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ESSENTIALS OF ECONOMIC 
THEORY 



AS APPLIED TO MODERN PROBLEMS 
OF INDUSTRY AND PUBLIC POLICY 



BY 

JOHN BATES CLARK 

PROFESSOR OF POLITICAL ECONOMY IN COLUMBIA 

UNIVERSITY 

AUTHOR OF " THE DISTRIBUTION OF WEALTH," 

"THE PHILOSOPHY OP WEALTH," "THE 

PROBLEM OF MONOPOLY," ETC. 



THE MACMILLAN COMPANY 

1907 

All rights reserved 



[LJSRARY of CONGRESSJ 
Two Copies RoGaivad 
NOV 5 J^O^ 
i Oonynehf Entry 

\ cuss A XXc, tia. 

I COPY B. 






CoPTRiGnT, 1907, 
By the MACMILLAN COMPANY. 



Set up and electrotyped. Published October, 1907. 



PREFACE 

In a work on the "Distribution of Wealth/' which 
was pubUshed in 1899, I expressed an intention of 
offering later to my readers a volume on "Economic 
Dynamics, or The Laws of Industrial Progress." 
Though eight years have since passed, that purpose 
is still unexecuted, and it has become apparent that 
any adequate treatment of Economic Dynamics will 
require more than one volume of the size of the pres- 
ent one. In the meanwhile it is possible to offer a 
brief and provisional statement of the more general 
laws of progress. 

Industrial society is going through an evolution 
which is transforming its structure and all its activi- 
ties. Four general changes are going on within the 
producing organization, and the resultant of them, 
under favorable conditions, should be an enrichment 
in which all classes would share. Population is in- 
creasing, capital is accumulating, technical methods 
are improving, and the organization of productive 
establishments is perfecting itself ; while over against 
these changes in industry is an evolution in the wants 
of the individual consumer, whom industry has to 
serve. The nature, the causes, and the effects of these 
changes are among the subjects treated in this 
volume. 

The Political Economy of the century following 
the publication of the "Wealth of Nations " dealt 
more with static problems than with dynamic ones. 



VI PEEFACE 

It sought to obtain laws which fixed the "natural" 
prices of goods and those which, in a like way, gov- 
erned the natural wages of labor and the interest on 
capital. This term natural as thus used, was equiv- 
alent to static. If the laws of value, wages, and in- 
terest had at this time been correctly stated, they 
would have furnished standards to which, in the ab- 
sence of all change and disturbance, actual values, 
wages, and interest would ultimately have conformed. 
The economic theory of this time succeeded in for- 
mulating, correctly or otherwise, principles of eco- 
nomic statics and a fragment or two of a science of 
economic dynamics, although the distinction between 
the two divisions of the science was not clearly before 
the writers' eyes. The law of population contained 
in the work of Malthus is the only systematic state- 
ment then made of a general law of economic change. 
Though histories of wages, prices, etc., furnished some 
material for a science of Economic Dynamics, none 
of them attained the dignity of a presentation of law 
or merited a place in Economic Theory. Students 
of Political Economy were at that date scarcely 
awakened to the perception of laws of dynamics, and 
still less were they conscious of the need of a systematic 
statement of them. A modest beginning in the way 
of formulating such laws the present work endeavors 
to make. 

The first fact which becomes apparent when eco- 
nomic progress is studied, is that static laws have a 
general application and are as efhcient in a society 
which is undergoing rapid transformation as in one 
that is altogether changeless. Water in a tranquil 
pool is affected by static forces. Let a quantity of 
other water rush in and there are superinduced on 



PREFACE Vll 

these forces others which are highly dynamic. The 
original forces are as strongly operative as ever, 
and if the- inflow were to stop, would again reduce the 
surface to a level. The laws of hydrostatics affect 
the waters in the rapids of Niagara as truly as they 
do those in a tranquil pool ; but in the rapids a further 
set of forces is also operative. In the work referred 
to, issued in 1899, an effort was made to isolate the 
phenomena of Economic Statics and to attain the 
laws which govern them. Necessarily this study 
made a certain impression of unreality, since it put 
out of sight changes which are actually going on and 
are the conspicuous fact of modern life. It assumed 
the conditions of a world without any such movement 
and endeavored to formulate laws which, in such 
a condition, would fix standards of value, wages, 
interest, etc. It put actual changes out of sight, 
intentionally and heroically, but with a full recognition 
of the fact that they are actually taking place and 
must in due time be introduced and studied. We live 
in what is par excellence an age of progress, and it is 
in part for the sake of perceiving the laws of progress 
that we first disentangle from them the laws of rest 
and make a separate study of these. The world 
from which change is excluded is unreal, but the 
static laws which can be most clearly discerned by 
mentally creating such a world have reality. Every 
day's transactions are governed by them as truly as 
a physical element like water in active movement is 
affected by forces which, if they acted alone, would 
bring it to a state of permanent rest. The first pur- 
pose, therefore, of the present work is to show the 
presence and dominance in the real world of the forces 
described in the earlier work. It brings static laws 



Vni PREFACE 

into view and endeavors to show how they act at 
any one particular stage of industrial evolution. Even 
while changes are examined, the fact is perceived 
that there are steadily at work forces which, if changes 
should cease, would make society conform to a certain 
imaginary static model and makes wages and interest 
also conform to static standards. 

Another purpose of the work is to examine seriatim 
the effects of different changes, to gauge the prob- 
ability of their continuance, and to determine the 
resultant of all of them acting together. It is impor- 
tant to know under what conditions changes proceed 
at a normal rate, and when the standard of wages 
rises as it naturally should. As the actual rate of 
wages pursues its rising standard, but lags somewhat 
behind it, it is necessary to know what determines 
the interval between the two, and when the interval 
is normal. What is called "economic friction" is 
the cause of this interval and is an element that is 
amenable to law. 

There is to be studied, not only the friction which 
obstructs the action of natural forces, but positive 
perversions of the forces themselves. Of these the 
chief is monopoly; and its influence, its growth, the 
sources of its power, and its prospect of continuance 
have to be determined. The actual tendencies of the 
economic system are against it, and so — if we ex- 
cept a few monopolies created for special ends — are 
both the spirit and the letter of the civil law. In a 
country in which law held complete sway, all objec- 
tionable monopolies would be held in repression. In 
order to see how much economic forces can be made 
to do in this direction, the present work discusses rail- 
roads and their charges, and some of the practices 



PREFACE IX 

of great industrial corporations, and tries to determine 
what type of measures a government should take in 
dealing with these powerful agents. In connection 
with monopoly and with the conditions of economic 
progress a study is made of trade unions, strikes, 
boycotts, and the arbitration of disputes between 
employers and employed, and also of the policy of 
the state in connection with them, and with money 
and protective duties. 

It is my belief that students should become ac- 
quainted with the laws of Economic Dynamics, and 
that they can approach the study of them advanta- 
geously only after a study of Economic Statics. The 
present work is in a form which, as is hoped, will 
make it available for use in class rooms, not as a 
substitute for elementary text-books, but as sup- 
plementary to them. It omits a large part of what 
such books contain, presents what they do not con- 
tain, and tries to be of service to those who wish for 
more than a single introductory volume can offer. 

An essential part of the theory of wages here stated 
was presented in a paper read before the American 
Economic Association, in December, 1888, and pub- 
lished in a monograph of the American Economic 
Association in March, 1889; and other parts of this 
theory were issued at intervals following that date. 
The theory of value was published in the New Eng- 
lander for July, 1881. I had not then chanced to see 
the early statements of the principle of marginal 
appraisal contained in the works of Von Thiinen and 
Jevons, and did not consciously borrow anything 
from their writings, but I gladly render to them the 
credit that is their due. I do not fear that I shall be 
supposed to have borrowed other parts of the general 



X PREFACE 

theory here offered. The theory of capital here 
stated was first presented in a monograph of the 
American Economic Association for May, 1888, and 
the discussion of money of which the present work 
gives a summary, in articles in the Political Science 
Quarterly for September, 1895, and for June and Sep- 
tember, 1896. The discussion of the relation of pro- 
tective duties to monopoly appeared in the same quar- 
terly for September, 1904. 

The author should, perhaps, apologize for the few- 
ness of the citations from other works which this 
volume contains. The richness of the recent litera- 
ture of Economic Theory, especially in America, 
would have made it necessary to use much space if 
the resemblances and the contrasts presented by points 
in this volume, and corresponding points in other 
volumes, had been noted. 

Worthy of special attention, if citations had been 
given, would have been the writings of Professors 
Irving Fisher, Simon N. Patten, and Frank A. Fetter 
of this country, and Professor Friedrich von Wieser 
of Prague, who have worked in various parts of the 
same field in which the studies here offered belong, 
and also those of Minister Eugen von Bohm-Bawerk 
of Vienna, who has treated some of the same themes in 
a strongly contrasted way. If merited attention 
were paid to the works of Hadley, Taussig, Carver, 
Seligman, Giddings, Seager, Walker, and a host of 
eminent foreign scholars, a large part of the space 
in the book would have to be thus preempted. 

I desire most gratefully to acknowledge the assist- 
ance which in the preparation of this book I have 
received from my colleague. Professor H. L. Moore 
of Columbia University, from my son, Mr. John 



PREFACE XI 

Maurice Clark, Fellow in Economics in Columbia Uni- 
versity, and from my former colleague. Professor A. S. 
Johnson of the University of Nebraska. Besides read- 
ing the manuscript and offering valuable suggestions, 
Professor Johnson has kindly taken upon himself 
the reading of the proof. 

JOHN BATES CLARK. 



V 



CONTENTS 

CHAPTER PAGE 

I. Wealth and its Origin 1 

n. Varieties of Economic Goods . . .20 

III. The Measure of Consumers' Wealth . 39 

IV. The Socialization of Industry ... 59 
V. Production a Synthesis; Distribution an 

H Analysis 74 

VI. Value and its Relation to Different 

Incomes . 92 

VII. Normal Value . 114 

VIII. Wages . .127 

IX. The Law of Interest 146 

X. Rent 159 

XI. Land and Artificial Instruments . . 174 

j/ XII. Economic Dynamics 195 

v 

XIII. The Limits of an Economic Society . . 210 

XIV. Effects of Dynamic Influences within 

the Limited Economic Society . . . 229 
XV. Perpetual Change of the Social Struc- 
ture 244 

XVI. Effect of Improvements in Methods of 

Production ....... 256 

XVII. Further Influences which reduce the 
Hardships entailed by Dynamic 

Changes 282 

XVIII. Capital as affected by Changes of 

Method 301 

XIX. The Law of Population .... 321 

XX. The Law of Accumulation of Capital . 339 
xiii 



XIV 



CONTENTS 



CHAPTER 

XXI. 



XXII. 

XXIII. 

XXIV. 

XXV. 
XXVI. 

V xxvii. 

XXVIII. 

XXIX. 

XXX. 

INDEX 



PAGE 

Conditions insuring Progress tn Method 

AND Organization 353 f^ 

Influences which pervert the Forces 

OF Progress 372 

General Economic Laws affecting Trans- 
portation 39g . 

The Foregoing Principles applied to 

the Kailroad Problem .... 416 
Organization of Labor . . . ' . 451 
The Basis of Wages as fixed by Arbi- 
tration 470 

Boycotts and the Limiting of Products 503 

Protection and Monopoly .... 517 

Leading Facts concerning Money . . 538 

Summary of Conclusions .... 555 

563 



ESSENTIALS OF ECONOMIC THEORY 
CHAPTER I 

WEALTH AND ITS ORIGIN 

The creation and the use of wealth are everywhere 
governed by natural laws, and these, as discovered 
and stated, constitute the science of Economics. 
Some of them come into operation only when men 
live in more or less civilized societies and work in an 
organized way, while others are operative wherever 
men work at all. Every man who lives must have 
something that can be called wealth, and, unless it 
is given to him, he must do something in order to 
get it. A solitary hunter, living in a cave, eating 
the flesh of animals and clothing himself in their skins, 
would create wealth and use it; but he would not 
take part in a social kind of industry. What he does 
could not be described as a bit of "social," "national," 
or "political" economy. Yet the gaining of his 
living would be an economic operation and would 
involve a creating and using of wealth. A statement 
of the laws governing the processes by which such a 
man makes the earth yield to him means of support 
and comfort would constitute a Science of the Econ- 
omy of Isolated Life, which is a part of the general 
Science of Economics. 

Primitive Capital. — If an isolated man hunts with 
good implements, he gets more game than he would 
have done if he had not used some of his time in 



2 ESSENTIALS OF ECONOMIC THEORY 

making such implements. It pays such a man to 
interrupt his hunting long enough to make a spear or 
a bow and arrows. This amounts to saying that it 
is an advantage to him to become, in a simple way, 
a capitalist as well as a laborer; for the primitive 
implements of the chase are forms of productive 
wealth, or capital. Moreover, if he possesses fore- < 

sight, he will keep enough food within reach to tide ' 

him over periods when game is not to be had, and 1, 

such a store is another form of capital. 

The Field of General Economics. — The economy i 

of a man who works only for himself is subject to 
laws that are based on his own nature and the char- 
acter of his material environment. Because he is 
what he is and because nature is what it is there is 
a certain way in which he must proceed, if he will r 
live at all, and there are certain conditions which \ 
must exist, if he is to live well. The inherent pro- 
ductive power of labor and of capital is of vital ! 
concern to him, since he is both a laborer and a capital- j 
ist; but he is in no way interested in what we com- 
monly call the relations of labor and capital, since 
that expression always suggests the dealings of one 
class of men, who labor, with another class, who own 
or control productive wealth. The study of such j 
relations takes us at once into the domain of Social I 
Economy; but we can study certain universal laws 
of wealth without at all entering that domain. When 
we speak of the power that resides in a bow and 
arrow, we refer to a truth of General Economics and 
one which illustrates the inherent power of capital, i 
though we may be far from thinking of lenders and 'i 
borrowers in a modern "money market" or of deal- 
ings of any one class of men with any other. 



WEALTH AND ITS ORIGIN 3 

The Field of Social Economics. — The moment that 
we begin to examine economic relations that different 
classes of men sustain to each other, we enter the realm 
of Social Economics; and we do this whenever we 
study modern business dealings. Even our hunter 
would take part in a social economy if he began to 
sell some of his game; and from that time on his 
income would depend, not wholly on his relation to 
material nature, but partly on his relation to other 
men. A good market for his game would come to 
be of the greatest importance to him ; and a market 
for anything implies a social method of securing 
wealth. 

Fundamental Facts Common to Primitive Life and 
Social Life. — The relations which men sustain to 
each other in civilized industry are thrown into the 
foreground in the science of Social or "Political" 
Economy.* It is an organized system of industry 
in which we are engaged, and it is that which we 
care most to understand. Until recently we have 
had a far less satisfactory understanding of the social 
element in industry — that is, of the relations that 
men who are producing wealth sustain to each other 

* Past usage renders the somewhat misleading term Political 
Economy more available than the more accurately descriptive 
term Social Economics, as the title of the science which treats 
of the creation and use of wealth by an organized society. 
Either title implies the existence of such an organization, 
but the word political calls attention to the fact that it is 
under a government. The fact that, in a study of wealth, 
is most important is that the exchanges of products which 
spontaneously take place create an industrial society whose 
activities, going on as they do under a government, constitute 
the subject of the studies which are properly indicated by the 
traditional term, Political Economy. Government as such 
is not the subject of those studies. 



4 ESSENTIALS OF ECONOMIC THEORY 

— than we have had of such general facts as a primi- 
tive producer needs to know. We have had, for 
example, much information concerning the materials 
which the earth contains and the way to make them 
useful. We have had a practical knowledge of what 
wealth is and of the mode of creating it, and we have 
been able to identify it as we have seen it either in 
the raw or the finished state. We have known what 
labor is, how it proceeds and what helps it needs to 
enable it to make clothing, to prepare food, etc. 
We have not known as much about the way in which 
the modern market for such products is regulated, 
and how a modern tailor or baker shares gains with 
the man who employs him and provides him with 
materials and tools, and the main purpose of study- 
ing Economics is to get an understanding of such 
social facts; but this cannot be done without first 
bringing before the mind the more general facts 
concerning the inherent nature of wealth itself and 
of the activities that are always necessary — in 
uncivilized life as well as in civilized — for creating 
and using it. 

General Facts First in the Natural Order of Study. — 
The primitive and general facts concerning industry, 
which, in a broad sense, is the creating of wealth, 
need to be known before the social facts can profit- 
ably be studied; and a statement of the principles 
of Political Economy should therefore begin by pre- 
senting a body of truth which is independent of 
politics and sociology and so general that it is illus- 
trated even in that simplest of all conditions, in 
which no market exists and every man makes by 
his own labor all the goods that he uses. The wealth 
of a Crusoe, that of a solitary Esquimau, and that 



WEALTH AND ITS ORIGIN 5 

of a pygmy in equatorial Africa have laws as well 
as that of a European or American employer or 
bondholder. ' The qualities in matter which make 
a share of it important for promoting the welfare of 
its possessor can be detected in the simplest com- 
modities that are anywhere used. All kinds of 
industrial products have- a common origin. Labor 
and capital act together in making a birch canoe 
as truly as they do in producing a transatlantic 
liner; and the productive power of each of these 
two agents is everywhere governed by certain general 
laws. Before ascertaining what is true of wealth 
when capital has become complex and when laborers 
have become specialists, each producing one particu- 
lar part of one product and securing many finished 
goods in exchange for it, it is well to state some facts 
relating to wealth which are so general that they 
appear in all stages of civilization. 

The Nature of Wealth. — The old English word 
weal describes a condition of life. It is the state 
of being "well off/' or of having one's wants amply 
supplied. Well-being in a broad sense of the term 
may depend largely on a man's state of health, 
his temperament, his conscience, or his relation to 
his friends; but the weal that is so secured is not 
described as a state of wealth. That depends on 
the possession of useful and material things, and 
the rich man has more of them than other men. 
The term wealth, which originally signified the state 
of being rich, afterwards came to be applied to the 
things which make a man rich, and it is thus that 
the term is used in the science of Economics. 

What Things constitute Wealth. — It is clear that 
useful things, like air, which are at hand in unlimited 



6 ESSENTIALS OF ECONOMIC THEORY 

quantity, do not make any one rich in this com- 
parative sense, for they benefit all alike; and, in so 
far as they are concerned, all men are on the same 
level of welfare. Moreover, since they are so abun- 
dant as to shower benefits everywhere in profusion, 
the quantity of them that a man has at his disposal 
may be lost or thrown away with entire impunity. 
He would only have to help himself again from the 
abounding supply which nature thrusts on him in 
order to be as well off as he was before. A bucket- 
ful of water on the shore of Lake Superior is of no 
importance to the man who has it. If it were spilled 
on the sand, the man would have only to dip up 
another bucketful, with an expenditure of effort 
that would be too small to take account of. If, 
however, fresh water were scarce, every bucketful 
would have its importance, and the loss of that 
quantity would make a distinct impression on the 
man's well-being. Whenever each particular part 
of the supply has this power to make a possessor 
better off than he would be without it, the substance 
is a form of wealth. The quality of being specifi- 
cally important is, therefore, the essential attribute 
of all the concrete forms of wealth. Sand by the 
seashore does not have any specific importance, 
since it is so abundant that the gain or loss of a 
wheelbarrow load would not make a man better 
off or worse off; but a pile of sand by the side of an 
unfinished building has this quality. There every 
barrow load is of consequence, for the available 
quantity is so small that diminutions reduce and 
additions increase the wealth of the possessor. Sand 
on the shore has the inherent power to help make 
mortar, and water in Lake Superior has the power 



WEALTH AND ITS ORIGIN 7 

to quench thirst, but neither of them has the attribute 
which would make it a form of wealth, namely, 
specific importance. Particular parts of the supply- 
may be lost with impunity. 

Varieties of Utility. — We have used the term 
importance, rather than usefulness or utility, to 
describe the quality which, if it exists in every 
particular bit of a substance, makes it all a form 
of wealth. With due care we may use the term 
utility. In a Way even a cup of water dipped by 
a fisherman from the lake is useful, for it renders 
a service. Though the man might lose it and be 
no poorer, he cannot say that the thing has no utility 
of any kind. He can say that it has no importance. 
What it has we may call absolute utility, or the 
power to do for a man something which he wishes 
to have done. When the fisherman is thirsty the 
water will do him good. It has an absolute service- 
rendering power; and yet this cupful makes the 
owner no better off than he would be without it, 
since the service which it is capable of rendering 
would be rendered whether the man had it or not. 
Absolute utility in an article is the power to render 
any service whatever, regardless of the question 
whether it would be rendered equally well if the 
article were absent. If conditions were such that 
the man would have to go thirsty in case he spilled 
his cupful of water, then this little supply would 
have what we may term effective utility, and this 
means that the presence of the particular bit is a 
positive element in conducing to the man's welfare. 
Usable things have absolute utility even when they 
are superabundant, but they have effective utility 
only when the quantity of them is so limited that 



8 ESSENTIALS OF ECONOMIC THEORY 

every particular bit of it is of some importance. 
Absolute utility and limitation of supply insure to 
them this quality; and this principle holds true in 
the economy of the most primitive state as well as 
in that of a civilized one. 

The Origin of Wealth. — Some of the things that 
have this kind ^ of utility have been given to man by 
nature. She has furnished some materials that are 
useful and has not furnished them in quantities 
sufficient to prevent them from being specifically 
important. On account of the comparatively nig- 

1 The term final utility is used with much the same 
significance as specific importance. It is the utility of the 
last and least important part of the supply, and the use of 
the term requires us to think of the supply as offered to users 
unit by unit till the whole amount is in their hands. The 
first unit, when it stands alone, is more important than any 
later one will be. The second is of less consequence, and the 
last is the least important of all. When, however, all have 
been supplied and are together available for use, one is as 
important as another. Each one has an effective utility 
which is measured by the service rendered by the last one. 
The term specific indicates that we measure the importance 
of the supply of an article not in its entirety, but bit by bit, 
while the term effective is the antithesis of absolute and means 
that each bit of the supply not only renders an absolute ser- 
vice, but renders one which would not be gratuitously ren- 
dered by some other part of the supply in case this portion 
were removed or destroyed. We do not here think of the 
supply as built up from nothing to its present size bit by bit, 
but look at it as it stands and measure the importance of 
any particular quantity. When we speak of final utility, 
we think of a series of "increments" supplied one after another, 
and in this case the successive increments become less and 
less important, since, after some have been supplied, the want 
of the kind of good that they represent is less keenly felt. 
The conception of the series of units is merely a means of 
isolating one unit from a total number and obtaining a mental 
measurement of its importance which corresponds with the 
effective importance of any unit in the entire quantity. 



WEALTH AND ITS ORIGIN 9 

gardly way in which she has doled them out to man, 
every bit of the supply has a power to benefit him; 
and if he gains some portions, he goes upward in 
the scale of well-being, and if he loses some, he goes 
downward. Wild fruits and fruit treelfe come in 
this category; and a savage who should build his 
hut in a small grove of banana trees, if he could keep 
other people out of it, would be, by so much, better 
off than they. The grove and its fruits would con- 
stitute their owner's wealth. 

Land an Original Form of Wealth. — Land is the 
original gift of nature to humanity, and wherever 
there are people enough to make the possession of 
a particular piece of it important, it becomes a form 
of wealth. It can be valueless only when population 
is very sparse; and then an increase in the number 
of people dwelling on it gives to it early the attribute 
of specific importance. The land that is accessible 
to a growing population cannot long be superabun- 
dant. 

Forms of Wealth produced by Labor. — Few useful 
goods are presented to man by nature in a finished 
state, and it is therefore necessary for man to exert 
himself in order to get the goods that he needs in 
the condition in which he can use them. He must 
make raw substances more useful than they naturally 
are, and as he does this the things become partly 
products of his labor. Of course the supply of them 
is limited, since labor is so. 

Labor a Wealth Creator. — Labor is a wealth-creat- 
ing effort, and there is no labor that is successful in 
attaining its purpose that does not help to bring 
into a serviceable condition something that can be 
identified as an economic good or a form of wealth. 



10 ESSENTIALS OF ECONOMIC THEORY 

Some effort, indeed, fails in what it attempts to do 
and therefore produces nothing. We may build 
a machine that will not work, or make a product 
that no one wants ; but labor that attains a rational 
purpose is .always economically productive. 

Protective Labor and the Attribute it imparts to 
Useful Matter. — Labor may be classed according 
to the particular result that it accomplishes. In 
saying that the banana grove in our illustration is 
wealth to the savage who resides in it, we had to 
insert the proviso that he is able to keep other per- 
sons out of it. Exclusive possession or ownership 
is necessary in order that things may continue to be 
effectively useful to any particular person or persons. 
If they are superabundant, as we have seen, no part 
of the supply is important ; but it is also true that if 
they are scarce and a man is not able to keep any of 
them, they will not serve him. In order that an 
economic good may be effective, it must be appro- 
priable, and where claimants are numerous and 
lawless it may take much of the owner's time and 
effort to keep the article in his possession. The 
savage must personally protect his goods, and to some 
extent the civilized man must do so; for however 
well policed a city may be, it will not do to leave 
purses or portable goods by the wayside. Protective 
labor is necessary in all stages of social advance- 
ment. In civilized life, indeed, we delegate much of 
it to a special class of persons, — policemen, judges, 
lawyers, and legislators, — and this is the most 
fundamental division of labor that civilization en- 
tails; but the work has to be done in any stage of 
social evolution. Crusoe's goods would have been 
worth nothing to him if he could not have kept them 



WEALTH AND ITS ORIGIN 11 

from the savages who, in time, appeared on his island ; 
and they would have been worth little if he had been 
forced to spend most of his time in guarding them. 

Appropriability is, therefore, a further essential 
attribute of the things which can make particular 
men richer by reason of their presence. When such 
things are actually brought into ownership, their 
utilities become available, as they would not other- 
wise be. Effort expended in protecting property 
is wealth-creating, since it causes those service-ren- 
dering powers which otherwise would be only poten- 
tial in goods to become active. In other words, it 
gives to things which are otherwise in a condition 
to be effectively useful a further quality which they 
require in order that they may actually promote 
an owner's well-being. 

Industrial Labor. — Industrial labor is the antithe- 
sis of protective labor, and it invariably changes 
the qualities of material objects in such a way as to 
make them useful; that is to say, it directly creates 
utilities.^ These utilities are of different kinds, and 
the labor may be classified according to the kind 
it creates. 

Elementary Utility. — An elementary utility is 
created when a substance is either dug out of the 
ground, as is done in mining, or when it is se- 
cured through the vital forces of the earth, as is done 

• The term create is here used in a somewhat loose sense 
and does not imply that the man originates matter or even 
that he always transforms it without calling in, as an aid, 
the forces of nature. The farmer must depend on vital forces 
in soil and air in order to raise a crop. What he and other 
laborers do is to cause the product in some way to come into 
existence, and he and they may in this sense be said to create 
the products which would not appear without them. 



12 ESSENTIALS OF ECONOMIC THEORY 

in agriculture. Hunting, fishing, and stock raising 
should be classed with agriculture, since they use 
the resources of animate nature to secure for man- 
kind new raw products on which labor will confer 
further useful qualities. This utility has to be 
created by men in every stage of industrial develop- 
ment, from that of a tropical savage to that of men 
in the most advanced civihzation.^ 

Form Utility. — A form utility is created when 
a raw material is fashioned into a new shape, sub- 
divided, or combined with other materials, as is done 
in manufacturing and, in a certain way, in commerce. 
Buying goods in bulk and selling them in small 
quantities is the creating of form utilities and makes 
an addition to total wealth. Oil in small cans is 
worth far more for consumption than it would be 
if each consumer were forced to buy a tankful. 
Sugar is worth more to a consumer when it is doled 
out to him in paper sacks than it would be if it were 
to be had only in hogsheads. Merchants are not 
mere exchangers, for they make positive additions 
to the utility of goods. In primitive life no such 
class exists; and yet form utilities of every kind are 
created, since men make for themselves the goods 
that they use and adapt them in shape and in quantity 
to their current needs. 

Place Utility. — Carrying things to places where 
they become more useful creates place utilities. In 

^ The distinction between elementary utility and others 
does not need to be applied with the utmost strictness, for 
mining creates form utility by breaking up masses of ore, and 
place utility by making them accessible. Agriculture shapes 
its products and moves them to places of storage. It is 
convenient in practice to adhere to the more general classi- 
fication suggested in the text. 



WEALTH AND ITS ORIGIN 13 

primitive life men do their own carrying; but in 
civilized states the common carrier does most of it, 
and so imparts place utility to matter on the most 
extensive scale. All useful transportation creates 
this quality, which is a general attribute of wealth; 
and the operation of so moving matter as to create 
place utility is one of the general functions of labor.^ 

Time Utility. — There is, moreover, a kind of 
utility which depends on the existence of a good at 
the time when it is needed. Ice in the warm season, 
a plow in the spring or the fall, a pleasure boat in 
summer, and anything which, by the aid of capital, 
is presented to a user when he needs it, illustrate 
this quality. We may call it time utility, and creat- 
ing it is a function of capital. We shall see how 
capital assists in the production of the other utilities ; 
but the creation of time utility it accomplishes 
without assistance. 

Executive and Directive Labor. — Labor involves 
the whole man, physical, mental, and moral. No 
labor is so simple that it is not better done when 
intelligence is used in the performance of it. The 
savage's hut, his canoe, his bows and arrows, etc., 

^ In a way all kinds of production may be analyzed into 
the moving of matter. In cutting up raw materials a manu- 
facturer moves waste portions away from those that are to 
be utilized, while combining materials, of course, moves them 
toward each other. Neither of these operations creates place 
utility. This quality consists in a relation, not between some 
materials and others, but between goods and the persons 
who are to use them. Bringing things to us from a distance 
changes their local relation to us, and in this is the essence 
of place utility, and every article that we use must have 
acquired this quality. The service-rendering power which 
it possesses is only potential until it reaches a place where 
the power can be exercised. 



14 ESSENTIALS OF ECONOMIC THEORY 

vary in their efficiency and value, not merely accord- 
ing to the time and muscular effort spent in making 
them, but also according to the efficiency of the 
thought by which those efforts are guided. There 
is here the germ of the difference between the exec- 
utive labor of the modern employee and the directive 
labor of the manager. Yet no manager directs in 
more than a general way the muscular movements 
of his subordinates, and their own intelligence must 
still be trusted to do much of the directing. The 
mental labor that guides and controls the physical 
is universal in industry, but becomes more and 
more a distinct and dominant factor as civilization 
increases. 

Fidelity as affecting the Productivity of Labor. — 
The fact that all workmen are largely their own 
directors brings fidelity into the foreground as an 
element in determining men's earning power; but 
this element counts for much more in the civilized 
state than it does in the primitive one, for here 
fidelity in directive laborers of the highest type is 
most important and difficult to secure. One of 
the greatest problems of modern business is how to 
make directors and executive officers of corpora- 
tions faithful to the stockholders who employ them. 
In the primitive state these problems do not arise. 
When a man is working for himself, mere interest 
largely takes the place of fidelity. If to-day any 
one secures a good house of his own to live in, it is 
because he employs contractors, overseers, and 
artisans all of whom are, in the main, faithful to 
his interests and see that the work of building is 
properly done. A savage looks after his own inter- 
ests as his personal work proceeds; and yet even 



"WEALTH AND ITS OEIGIN 15 

in his case there is the germ of that enthronement 
of character in the supreme place which is the 
prominent feature of highly organized industry. In 
building a hut to shelter his family, a savage puts 
into his work conscience and affection as well as 
muscular effort; and when the mother of the family 
does this work, the altruistic element in it is still 
more conspicuous. As society becomes highly or- 
ganized the importance of the moral element in all 
labor increases till the further progress, or even the 
existence, of the social order may be said to depend 
on it. In the world of business there is now distrust 
and turmoil, and revolutions are feared, because of 
the unfaithfulness of a class of men to trusts com- 
mitted to them.^ 

The Requisites of Production. — If we start with 
nothing but the earth in its natural state, inhabited by 
empty-handed men, and seek to know what is neces- 
sary in order that some wealth may be created, 
we find that nothing is absolutely necessary except 
labor. By working for a few minutes it is possible 
to get something that will minister directly to wants. 
Yet if men begin operations in a state of such poverty 

^ On the ground of convenience, we may classify labor 
as physical or mental, according as the work of muscle or of 
brain is especially prominent. Digging a ditch requires more 
than an average amount of strength and not even an average 
amount of intelligence, and it is, therefore, physical labor 
rather than mental; while writing a brief or arguing a case 
in court requires much power of thought and only a small 
amount of muscular strength, and is typically mental labor. 
Managing an estate for an absent owner is more largely a 
moral function, since the value of the service depends chiefly 
on the fidelity of the man who renders it; but physical and 
intellectual labor are also involved. These three types of 
personal effort are exerted wherever wealth is created. 



16 ESSENTIALS OF ECONOMIC THEORY 

that they have only their bare hands to apply to 
the elements about them, they do not commonly 
get the usable goods immediately. If a savage 
wants fish and makes the rudest net with which to 
catch them, he makes what is a capital good. This 
is wanted only for the sake of the consumers' wealth 
which it will help to produce. The end in view 
has all the while been fish; but the man works first 
on an instrument for catching them. He makes 
the net by mere labor, but he catches the fish by 
means of labor and the net. Without such instru- 
ments to aid in production a dense population could 
not live at all, and a very sparse one could live only 
in a meager and precarious way. If the instruments 
are artificially made, or if they are furnished by 
nature in limited amounts, they are forms of wealth, 
or goods; but as their function is not to minister 
directly to consumers' wants, but to help in making 
things which do this, we distinguish them by the 
name "producers' goods" or "capital goods." In 
contrast with them those commodities which di- 
rectly minister to wants may be called "consumers' 
goods." 

The Production of Intermediate Goods. — All eco- 
nomic goods are means to an end. Wealth is always 
mediate. It is usually a connecting link between 
man's labor and the satisfaction of his wants. Man, 
the worker, first spends himself on nature, and then 
nature in turn spends itself on him. In production 
nature is the recipient, but in consumption the re- 
cipient is man. This is saying that man serves 
himself by means of some element in nature which, 
under his manipulation, becomes a form of wealth. 
He thrusts a bit of natural matter between himself 



WEALTH AND ITS ORIGIN 17 

as a producer and himself as a consumer. All kinds 
of wealth, then, stand in an intermediate position 
between original labor and the gratification that 
ultimately results from it. Some goods, however, 
are means in the special sense of standing between 
labor and other goods. Instruments help to make 
consumers' goods and these add to man's pleasure. 
Using a tool is not generally agreeable. The tool 
stands not only between the effort and the gratifica- 
tion that will ultimately follow, but between the 
effort and the further material good that will di- 
rectly produce gratification. The hatchet inter- 
venes between the labor that makes it and the fire- 
wood it will cut, while the wood acts directly on 
the man and keeps him warm. Capital goods are 
in this special sense mediate. They are not wanted 
for their own sake, but for the sake of something 
else that is directly useful.^ 

All Labor immediately Productive of Wealth. — 
When a savage abandons the plan of fishing from 
the shore and gives his labor for a fortnight to mak- 
ing a canoe with which to fish more effectively, he 
interposes an interval of time between his labor 
and its ultimate fruits, the consumers' goods. There 
is no such interval between the labor and the kind 
of wealth that it first creates, namely, the canoe. 
This immediate product of labor is itself a form of 
wealth and at once rewards the laborer, since it is 
what he needs, though he does not need it for con- 
sumption. Industry always pays as it goes and 

* For an elaboration of the conception of mediate goods 
the reader is referred to Von Bohm-Bawerk' s work on "Positive 
Theory of Capital " and to John Rae's work on " The Sociologi- 
cal Theory of Capital." 



18 ESSENTIALS OF ECONOMIC THEORY 

tolerates no hiatus between labor and wealth in 
some form. 

Organized Industry immediately Productive of Con- 
sumers^ Goods. — If one man were keeping the stock 
of canoes of a few fishermen in repair and taking 
as his pay a share of each day's catch, he would not 
have to wait for his food any longer than the fisher- 
men themselves. This mode of conducting the 
industry, however, involves organization. If each 
fisherman had to make his first canoe, it would be 
necessary for him to wait for fish; but as soon as 
a stock of. canoes has been obtained and a special 
set of men assigned to the work of keeping this 
stock intact in number and quality, that necessity 
entirely ceases. Five men may do nothing but 
fish while a sixth keeps their stock of canoes intact 
by repairing old ones left on the shore and making 
new ones to replace such as are beyond repairing. 
Fishing and boat building may go on simultaneously, 
and all the men may go share and share in each day's 
catch. ^ This is a type of what goes on in modern 
industry, where a complex stock of capital goods 
always exists and is kept intact by the action of 
a class of persons who share the returns that come 
from using the stock. None of these persons has 
to wait for food, although some of them devote 
themselves exclusively to the production of tools. 
This fact shows that the necessity for waiting, as 
well as working, wherever instruments are in the 
process of manufacture, is not among the universal 

1 One man might be employed in guarding canoes and 
fish against theft, which is doing protectiA'^e rather than in- 
dustrial labor; and economic forces would tend to give him 
a share as large as each of the others receives, provided, of 
course, that the men are of equal capacity as workers. 



WEALTH AND ITS ORIGIN 19 

phenomena of economics, and that it is not present 
in that organized industry which we chiefly study. 
Such a permanent stock of capital goods as the 
fishing community of our illustration possesses 
would enable it to get its food, the fish, day by day, 
by working in different ways and using the per- 
manent stock. If we call this permanent supply 
of canoes, etc., capital, it is, in a causal way, mediate- 
wealth, though it is not so in point of time. Some 
labor is spent each day on it, and itself creates each 
day some consumers' wealth. These two operations 
go on simultaneously, and the men who work to 
maintain the stock and those who use it get their 
returns together. In very primitive life the work 
spent on capital goods and that spent on consumers' 
goods are not always synchronous, but organization 
and the acquiring of a permanent fund of capital 
make them so. Work to-day and you eat to-day 
food that is a consequence of the working. In point 
of time the canoe makers are fed as promptly as 
the fishermen, and this fact is duplicated in every 
part of the industrial system. We shall later see 
more fully what this signifies, but it is clear that 
any study of this phenomenon — the synchroniz- 
ing of labor and its reward — takes us out of the 
field of Universal Economics, since it does not appear 
in the industry of primitive beginnings, but is the 
fruit of organization.^ 

^ The conception of capital goods as always putting en- 
joyments into the future has crept into economic science 
because in certain illustrations taken from primitive life they 
seem to have that effect. We shall see that they do not have 
it at all in static social industry, and that they have it only 
in a limited way in dynamic social industry, or that which is 
carried on by a society undergoing organic change. 



CHAPTER II 

VARIETIES OF ECONOMIC GOODS 

Passive Capital Goods. — Labor spends itself on 
materials, and these, in their rawest state, are fur- 
nished by nature herself. They ''ripen" as the 
work goes on. Every touch that is put on them 
imparts to them more of the utility which is the 
essence of wealth. They are technically "goods," 
or concrete forms of wealth, from the moment when 
they begin to acquire this utility, though for a time 
they are in an unfinished state. The function of 
materials, raw or partly finished, in the physical 
operation of industry is a passive one, since they 
receive utility and do not impart it. The iron is 
passive under the blows of the blacksmith's hammer; 
leather is passive under the action of the shoemaker's 
sewing machine; a log is passive under the action 
of the lumberman's saw, etc. The materials which 
are thus receiving utilities under the producers' ma- 
nipulations constitute a distinct variety of capital 
goods, while the implements which help to impart 
the utilities constitute another variety, and both 
kinds are present in all stages of industrial evolution. 
Savages use raw materials and tools for fashioning 
them. 

Active Capital Goods. — The hammer which fash- 
ions the iron, the awl which pierces the leather, and 
the saw that cuts the log into boards have an active 

20 



VARIETIES OF ECONOMIC GOODS 21 

function to perform. They do not receive utilities, 
but impart them. They manipulate other things 
and are not themselves manipulated; and except 
as unavoidable wear and tear injure or destroy 
them, they are not themselves at all changed by 
the processes in which they take part. They are 
the workman's active assistants in the attacks that 
he makes on the resisting elements of nature. Pas- 
sive instruments, then, and active ones — things 
which receive utility, as industry goes on, and those 
which impart utility — constitute the two generic 
kinds of capital goods. What is commonly called 
''circulating capital" is a permanent stock of passive 
capital goods ; and, in like manner, what is usually 
known as "fixed capital" is such a stock of capital 
goods of the active kind. The materials and the 
unfinished goods that are scattered through a modern 
mill and receiving utility are what the manufacturer 
would at this moment identify if he were asked to 
point out the things in which he has circulating 
capital invested; while the mill, the machinery, 
the land, etc., which are imparting utility, are what 
he can point to as now constituting his fixed capital. 
At a later time there will be other goods of both 
kinds in his possession, and these will at that time 
embody the two kinds of capital. While a primi- 
tive man would have little occasion to use the term 
capital goods, he would possess both varieties of the 
goods which the term denotes. 

Varieties of Active Capital Goods. — Mere hand 
tools act as armatures attached to the person of ^ 
the worker, and they enable him effectively to 
attack resisting substances. The hammer fortifies 
the blacksmith's hand against the injuries it would 



22 ESSENTIALS OF ECONOMIC THEORY 

suffer if he delivered blows with his fist, and it multi- 
plies the efficiency of the blows. Machines, how- 
ever, substitute themselves for the person of the 
worker and carry the tool through its movements. 
A steam hammer, so called, is an engine that gets 
power from a boiler and wields an armature, which 
is the real hammer, much as a smith would do it, 
though with far greater force and effect. Machines 
do rapidly and accurately what a manual laborer 
would, without them, have to do slowly and im- 
perfectly, by carrying the armature in his own hand 
and moving it by his own muscular strength. Tools 
and machines impart ''form utility" to materials. 
Vehicles which carry goods impart ''place utility'' 
to them by putting them where they are more use- 
ful than they would be elsewhere. Buildings pro- 
tect goods and workers alike, and enable the opera- 
tion of transforming them to go on successfully. 
They also make it possible to store goods at a time 
when they are not needed and take them out for 
use when they are needed. In doing this, buildings 
help to impart "time utility" to the merchandise 
that is put into them by keeping them intact till 
the time comes when they will be useful. Tools, 
machines, reservoirs of water, canals, roadways, 
buildings, and even land itself are active capital 
goods, and are, for that reason, component elements 
of that part of the permanent productive fund 
which is known as fixed capital. They aid workers 
in their efforts to bring materials into usable shapes, 
and this is as true of the hole in the earth in which 
a savage stores provisions as it is of a fireproof 
warehouse in a modern city. 

Materials which are at first Passive and later pass 



VARIETIES OF ECONOMIC GOODS 23 

into the Active State. — The hammer itself has to 
be made out of raw material, and, while it is in the 
making, the material that enters into it is as passive 
as anjrthing else. While the ore is smelting and 
while the steel is forging, the future hammer is in 
a preliminary stage of its existence and is discharg- 
ing a passive function. When it is completely 
finished, its period of activity begins, and from this 
time on it helps to manipulate other things. The 
materials which enter into consumers' goods go 
through no such transition. The leather remains 
passive till, in the form of a pair of shoes, it clothes 
its user's feet; and at this point it ceases to be a 
capital good at all. The steel of the hammer is 
first a passive good and later an active one. 

The Use of Capital Goods Universal. — There is 
no doubt that capital goods are used in the most 
primitive industry. Implements existed in times 
too remote for tracing; and even if they had not 
been used, raw material would have been indis- 
pensable. People living in an economic stage so 
ultraprimitive as to use no mediate goods whatever 
could sustain life only by plucking wild fruit or 
gathering fish or other food stuff by hand, and so 
long as they could do this their industry might con- 
ceivably consist in getting consumers' goods by 
labor only. The rudest pick, shovel, or ax and 
the simplest hunting implement are early types 
of what, in ''capitalistic production," is represented 
by mills with their intricate machines, ships, rail- 
roads, and the like. Primitive industry has capital 
but is not highly capitalistic, since labor and a little 
capital in simple forms are all that it requires. These 
primitive capital goods are still essential. 



24 ESSENTIALS OF ECONOMIC THEORY 

Capital. — It might seem that we have already 
described the nature of capital, but we have not. 
We have described the kinds of goods of which it 
consists. A sharp distinction is to be drawn between 
two ways of treating capital goods, and only one of 
these ways affords a treatment of capital properly 
so called. To attain that concept we must think 
of goods as in some way constituting a stock which 
abides as long as the business continues. And yet 
the things themselves separately considered do not 
abide. Goods are perishable things; no one lasts 
forever, and some last only a very short time. Raw 
materials best serve their purpose when they are 
quickly transformed into usable goods and taken 
out of the category of productive instruments. 
Tools may last longer, but they ultimately wear out 
and have to be replaced. . 

How Capital Goods Originate and Perish. — If 
you watch a particular mediate good of the passive 
kind, say wood in a growing tree, you see it begin- 
ning its career as an absolutely raw material, and then 
under the hand of labor, aided by tools, receiving 
utility till it takes its final form in some article for 
a consumer's use, say a dining table. Little labor 
is applied to it during the first stage of the process, 
that in which the tree is guarded and allowed to 
grow to a size that fits it for conversion into lumber ; 
but the cutting, carrying, sawing, and fashioning are 
done by labor and tools, and under their manipu- 
lations the wood ''ripens" in the economic sense 
— that is, it becomes quite fit for consumption. 
It is ready to serve a consumer as a table, and, when 
this service begins, the wood that up to this point 
has been a passive capital good, constantly receiv- 



VARIETIES OF ECONOMIC GOODS 25 

ing utilities, will cease to be a capital good at all 
and begin slowly to wear out in the service of its 
owner/ 

The Transition of Goods from one State to Another. 
— The beginning of its service in the purchaser's 
dining room takes the wood of the table out of the 
category of producers' goods; but there is some 
raw material that is never destined to emerge frorn 
that category and enter another. Its last state of 
existence as a good will be that in which it is em- 
bodied, not in an article for consumers' use, but 
in an active tool. Our tree might have furnished 
some of its wood for a wheelbarrow, and if so, that 

* In the economic sense consumption is the utilization 
rather than the destruction of the thing consumed, though 
many things go rapidly to destruction in the process. Food 
is destroyed in the moment of using; clothing perishes more 
slowly by use, and furniture and dwellings more slowly still. 
Some things that go gradually to destruction during the 
process of utilization do not perish the more rapidly because 
of it. A vase, a statue, or a picture is consumed, in the ec- 
onomic sense, by a person's act of looking at it and getting 
pleasure from it; but this does not hasten its deterioration 
except as keeping such an ornament where it can be seen 
exposes it to deterioration or accident. Climbing a hill to 
get a view "consumes" the hill in a true sense, and looking 
from the summit over a wide stretch of picturesque country 
even consumes — that is, utilizes — the landscape ; and 
certainly this act does not injure the thing utilized. The 
general fact, however, that goods for final use are, as a rule, 
injured or destroyed either by the act of consumption or by 
the exposures that are incidental to it, justifies the use of this 
term to express the receiving of a service from the usable 
article. It is a process in which the commodity acts on men's 
sensibilities and, as a general rule, exhausts itself while so 
doing. It is worth remembering that this exhaustion of the 
good is not the essential part of consumption. On the man's 
side that consists in deriving benefits from the good, while on 
the side of the good itself it consists in conferring benefit on 
the man — in doing him good and not in doing itself harm. 



26 ESSENTIALS OF ECONOMIC THEORY 

part of it would have been a capital good until it 
ceased to be an economic good at all. If we watch 
it as it grows toward its economic maturity, we 
see it sawed, planed, and otherwise fashioned under 
the laborer's hand, and maintaining during all this 
time its passive attitude, just as does the wood that 
is destined to constitute a table. When the wheel- 
barrow is completed, it does not, like the table, 
begin to minister directly to consumers' wants, 
but begins actively to aid some laborer in a further 
productive operation. It carries mortar to the 
wall of an unfinished building and is thus taken 
out of the list of passive goods — recipients of utility 
— and is ranged with other active tools which im- 
part utility. The same thing is true of the steel 
that is destined to compose the head of a modern 
woodman's ax or the stone that is in process of 
fashioning into the rude hatchet of some primitive 
savage. As raw or partly wrought material it is 
a passive capital good; later it becomes an instru- 
ment of the active sort. 

The Ultimate Perishability of all Kinds of Goods 
artificially Made. — In the end both kinds of ma- 
terial will cease to be capital goods. The raw stuff 
that goes into food, clothing, furnishings, or the 
like will become consumers' goods, while the raw 
material of tools will, in its final form, the tools 
themselves, have one more lease of life as capital 
goods. In the end, however, as wheelbarrows, 
axes, hatchets, and the whole long list of active 
implements are used up, they cease to be capital 
goods because they cease to be economic goods at 
all. They are as truly ordained to be ultimately 
used up as are food and clothing, and this is true 



VAEIETIES OF ECONOMIC GOODS 27 

of the most durable things that are artificially made. 
Walls, roadways, bridges, and buildings slowly de- 
teriorate till the time comes when for productive 
purposes their room is worth more than their company. 
Why the Perishability of Capital Goods does not 
put Capital out of Existence. — Perishability is the 
most striking trait of capital goods. Each particu- 
lar one comes and goes, but there is always a stock 
of them on hand; for when one is on the point of 
going, another is ready to take its place and keep 
up the succession. New tools replace old tools; 
new materials replace those that are finished and 
withdrawn, and so it comes about that a stock of 
such things abides forever. Not one of the individ- 
ual instruments is permanent, for each one only 
does its part in keeping up an endless procession. 
It is the procession that is always there — a moving 
series of individual goods, not one of which has more 
than a transient economic career. Each one helps 
to keep up the supply of permanent capital just 
as each man, taking his turn in an endless succes- 
sion of laborers, serves during his brief life to keep 
up the permanent force of laboring humanity. Men 
come and go, but "labor" — a mass of working 
humanity — abides ; and so capital goods come 
and go, but a stock of them abides, kept up by 
perpetual replacement. We may trace the career 
of any single instrument from a beginning to an end ; 
but we may, on the other hand, cease to look at any 
instruments that we single out and identify and 
look rather at the procession of them; and if we do 
this, we look at a body which never wastes away, 
though the things that compose it are, separately 
considered, forever wasting. 



28 ESSENTIALS OF ECONOMIC THEORY 

There are many kinds of transient things which, 
by the same process of renewal, constitute permanent 
entities. Composing a human body at this moment 
are certain tissues that can be separately identified; 
and if we watch any one of them, we shall see it going 
in a short time to destruction. Yet the body lasts 
while life continues. Indeed, the evidence of the 
life itself is the discarding and replacing of the tis- 
sues. A living body is a durable thing, though the 
particular tissues that at any one time compose 
it are not so. In a like way drops of water make 
a river, and this is a permanent thing, however 
rapidly its composition changes. The waterfall 
that drives the machinery of a mill is permanent, 
though no particular particle of water remains in 
it for more than a moment. Society is permanent, 
though the men who compose it are short-lived. 
In an exactly similar way a body of capital goods 
is maintained as a perpetual instrumentality of 
production. This is capital properly so called. It 
is, as it were, a quasi-living body, perpetuated by 
the constant replacement of the component parts, 
which are destroyed as its normal activities go on. 

The Difference between Capital Goods and Capi- 
tal Summarized. — The distinction between capital 
goods, on the one hand, and capital, on the other, 
is, then, hke that between particular tissues and 
a living body, or hke that between particular parti- 
cles of water in the river and the river that flows 
forever. We can single out and watch certain 
drops of the water as they flow from a spring, and 
we can trace them through their brief careers, and 
say truly that the river is composed of fickle and 
transient stuff; but we cannot say that the river 



VARIETIES OF ECONOMIC GOODS 29 

is transient. That is perpetuated by the renewing 
of the supply of water as the original drops dis- 
appear. We can mentally watch a particular man, 
as he enters the social force of workmen, labors 
for a time, and drops out of the line, and can see that 
society is composed of transient material; but 
society itself is an abiding thing. So we can study 
a particular bit of ore or wool or leather or a par- 
ticular hammer or spindle or sewing machine, and 
in those cases we shall be studying capital goods 
and finding how perishable they are; but we shall 
also see that a stock of them always abides as the 
capital of economic society. We can cease to look 
at individual things and study the permanent fund 
of productive wealth, which is made up of goods 
like ore, wool, leather, hammers, spindles, and sew- 
ing machines. The identity of the things which 
make up this stock is forever changing. The same 
list of things we shall never find in the stock on any 
two dates, but a supply of similar things forever 
abides. Capital is this permanent fund of productive 
goods, the identity of whose component elements is 
forever changing. Capital goods are the shifting 
component parts of this permanent aggregate. They 
are the particular instruments that, each during 
its own brief economic lifetime, take their places 
in the endless procession of things which in its 
entirety is an abiding productive agent — the 
co-worker of labor and its perpetual assistant in 
creating consumers' wealth. 

' The Business Man's View of Capital. — It is as 
such an abiding entity that a business man regards 
capital. He describes it nearly always as a sum 
of money. Thus the capital of a manufacturer is 



30 ESSENTIALS OF ECONOMIC THEORY 

"a, million dollars" because a stock of instruments 
worth that amount is kept intact in his possession. 
It is not allowed to waste away, however much 
the constituent parts of it may shift. The waste 
and renewal which business entails leave the equiv- 
alent of the million dollars always on hand, though 
never in the literal shape of money. A stock of 
shifting goods always worth a million dollars is, by 
a figure of speech, described as a million dollars 
"invested in the goods." ^ 

The Chief Attribute of Capital. — A chief attribute 
of capital, properly so called, is permanence. If 
a man's productive fund does not last, he is im- 
poverished. The farmer keeps on hand a more or 
less constant supply of the implements he has to 
use. He takes a part of the proceeds of the sale 
of his crops, puts it into the shape of implements 
and materials, and in this way keeps an amount 
of them on hand as the auxiliary * capital of agri- 
culture. Particular goods are not constant, but the 
sum of money or quantum of wealth "invested" 

* We here put out of sight all questions connected with 
the changing purchasing power of money. This is, in ordinary 
times, the business man's habit. He considers his capital 
intact if the number of dollars invested originally in his busi- 
ness still appears on his inventory as representing the net 
surplus of his assets over his liabilities. If a currency were 
undergoing rapid inflation, a fixed amount of invested money 
would represent a shrinking stock of capital goods. This 
stock would last always, but would grow smaller by a true 
standard of measurement. All that we are at present inter- 
ested in knowing is that practical usage treats capital as a 
permanent fund of productive wealth, and most conveniently 
describes it as a fixed amount of money "invested" in goods 
of a productive kind. What is thought of as "money" abides. 
Of course the practical man does not regard it as actually 
composed of currency. 



VARIETIES OP ECONOMIC GOODS 31 

in the moving procession of them is so. At any 
one instant the capital is composed of particular 
instruments which can be sought out and identified, 
but at no two instants are the goods the same. 

The Reasons for describing Capital as a Sum of 
Money. — This fact explains the general practice of 
describing capital in terms of money. The manu- 
facturer just referred to will speak of his capital, 
as "a milHon dollars" and consider that sum as a 
"permanent investment" because he knows that 
while the goods that now represent that value will 
soon pass from him, the "dollars" — that is, the 
value which is equivalent to the dollars — will 
abide. There is, moreover, no failure on his part 
to discriminate between his capital and literal money, 
for he knows in what his productive fund consists, 
and is fully aware that only the minutest part of it 
is in the shape of actual currency. 

Instruments of production compose the fund, 
but the dollars serve to describe it. They indicate 
the amount and the abiding quality of it, since they 
describe what he has invested or embodied in the 
shifting things and can, by a fair sale, get out of 
them. 

Why Abstract Terms are used in popularly de- 
scribing Capital. — In certain connections money 
is, in unintelligent thinking, confused with real 
capital in ways that we should guard against. In 
avoiding such errors we need to be even more careful 
that we do not miss the truth that is at the basis 
of the common mode of describing capital. A 
permanpnt fund that is spoken of as a million dollars 
invested in a business does not suggest to any one 
a literal pile of a miUion silver or paper dollars or 



32 ESSENTIALS OF ECONOMIC THEORY 

of a hundred thousand gold eagles. It suggests 
what is actually in the business, a procession of 
things each of which comes into the man's posses- 
sion and then leaves him, and helps him to keep 
the constant stock of goods that at any time is a 
potential million of dollars. A permanent body 
of any kind, if it is made up of shifting tissues, is 
commonly described by the use of an abstract term. 
A waterfall, made as it is of rapidly changing drops 
of water, is spoken of as a ''water power," since 
the power is the abiding thing. An endless series 
of living human beings is described as ''humanity," 
since that remains through all personal changes. 
An endless series of workingmen is described as 
"labor," and we study the "wages of labor," the 
"relations of labor to capital," etc., because these 
are permanent relations. Men come and go, but 
labor continues and is the source of a permanent 
income. It is actually the fact that in speaking of 
the "labor problem" or the "relation of capital 
and labor" we usually think of "labor in the ab- 
stract," as we might term it; but this is very far 
from implying that we consider a series of genera- 
tions of actual workingmen as an abstraction. We 
may, using terms in a like way, speak of the problem 
of interest as concerning "capital in the abstract"; 
but this is far from meaning that we consider an 
endless series of material instruments of industry 
an abstraction. We describe these real things by 
the use of an abstract term, just as we describe 
a thousand other realities. A "fund," a "value," 
a "permanent quantum of wealth," is capital; but 
with the abstract notion the mind always merges 
the thought of the concrete entity. It is the tools 



VARIETIES OP ECONOMIC GOODS 33 

of industry that, in their endless march, come into 
and go out of the industrial field that we think of 
even when we use the abstract term. This term, 
however, saves us from the danger of thinking 
merely of particular tools that we can identify and 
trace to their final destruction when we form the 
concept of capital. 

The Importance of discriminating between the 
Concept of Capital Goods and that of Capital. — 
Very great is the importance of keeping sharply 
distinct the two concepts of productive wealth of 
which one is described by the term capital goods 
and the other by the term capital. In the one case 
we think of a particular thing which we identify, 
keep in mind, and watch as it goes through its trans- 
formations, does its final work, and perishes. The 
brilliant studies of Professor Bohm-Bawerk are 
based on the idea that such a tracing of the biog- 
raphy of a particular instrument is the true way 
to solve the problem of interest. Yet the very 
term interest itself suggests the existence of what 
we have defined as permanent capital — an abiding 
fund or sum of wealth that every year yields as an 
income a certain percentage of itself. The "hundred 
dollars" yields five dollars; that is, the fund yields 
a twentieth of the amount which, amid all the changes 
of its constituent parts, it continues to embody. 
It is true, indeed, that a study of all capital goods 
which have existed or will exist, with due attention 
to their relations to each other, would reveal the 
fact that they maintain such an endless procession 
as has been here described, and it would thus bring 
before the mind such a concept of capital as the 
business man has and describes by the monetary 



34 ESSENTIALS OF ECONOMIC THEORY 

form of expression. By making a synthetic study 
of capital goods in general, and not separate studies 
of particular goods as they come and go, we can 
obtain a grand resultant of the action of all of 
them, which is nothing less than permanent capital 
doing its continuous work. Such a comprehensive 
study of capital goods, if it is carried far enough, 
becomes a study of the abiding entity, capital. 
Allowing ourselves, however, to put the abiding 
entity out of sight and merely to trace the origin, 
growth, and productive action of separate instru- 
ments of production would be disastrous. The 
undying body in which the particular things are 
tissues absolutely needs to come into view. The 
very mention of a problem of interest — of the 
percentage of itself that a fund of a given amount 
can annually earn — puts before us at once the 
permanent entity, capital, and the problems relating 
to it.^ 

^ Consumers' goods may be regarded in the two distinct 
ways in which it is necessary to regard capital goods. We 
may look at particular articles for consumption, as they begin 
their careers by ministering to their owners' needs, and follow 
them as they wear out and finally perish. This gives a con- 
ception of them which is analogous to the conception of capital 
goods rather than to that of capital. On the other hand, 
we may look at the permanent stock of usable articles, which 
is maintained by the constant coming of new ones to replace 
those which are worn out, and in this way we get a conception 
of 'permanent consumers' wealth. The flow of finished goods 
from the shops to the users offsetting the concurrent destruc- 
tion of such articles in the users' hands, has the effect of 
maintaining a permanent fund of consumers' wealth con- 
sisting of perishable goods the identity of which is always 
changing; and this fund is analogous to permanent capital 
as we have defined it. Professor C. A. Tuttle has advocated 
the use of the generic term wealth to denote the two con- 
tinuing funds which we have here termed, on the one hand, 



VARIETIES OF ECONOMIC GOODS 35 

Labor as a Permanent Entity. — The term labor 
is sometimes used to describe a permanent aggrega- 
tion of laborers no one of whom Hves and works 
through more than a brief period. Labor is thus 
analogous to capital and laborers to capital goods. 
A permanent working force is composed of perish- 
able beings as a permanent producing fund is com- 
posed of perishable goods. Both are commonly 
described by the use of abstract terms, but both 
are in reality concrete things; and actually to re- 
duce either to a mere abstraction would be to put 
a material entity out of existence. We instinctively 
speak of a value — a given number of dollars — 
in describing a man's capital, but it is dollars 
*' invested in" productive instruments; and we in- 
stinctively speak of labor when we mean an abid- 
ing force of workingmen. Neither capital nor labor 
is like an immaterial soul that can live apart from 
its body. Each consists of a permanent body with 
a shifting composition. A permanent sum, on the 
one hand, a permanent amount of working energy, on 
the other, are always present, but they are in goods 
and men respectively. Each may well be described 

capital, and, on the other hand, the permanent stock of con- 
sumers' wealth. We have preferred to use the term wealth 
in a sense that is generic enough to include both capital and 
capital goods, and both the permanent stock of consumers' 
goods and the particular articles that, in turn, compose it. 
Wealth consists of effectively useful concrete things regarded 
either as particular articles that can be identified and watched 
till they perish in the using, or as an abiding stock of articles 
of this genus, each one of which has in itself only a transient 
existence. See an article on "The Wealth Concept," by Professor 
Charles A. Tuttle, in the Annals of the American Academy 
of Political and Social Science, for April, 1891, and other 
articles by the same author. 



36 ESSENTIALS OF ECONOMIC THEORY 

by the use of an abstract term, and in prac- 
tical life it commonly is so; but it is a concrete 
reality. 

Peculiarity of Land as a Capital Good. — One 
reservation needs to be made when we call capi- 
tal goods perishable. If we include land under 
this term, we must make it an exception to the 
rule of destructibility. It is the only thing that 
does not go out of existence in the using. It is 
not a produced good at all and does not stand, 
like other goods, in an intermediate position be- 
tween labor and the gratification that labor is in- 
tended to produce. Work did not create it and 
using will not end it. It will be called, in our 
study, a capital good, for it is a form of wealth 
which produces other wealth. It enters into 
the permanent productive fund that society is 
using. 

Differences between Land and Other Capital Goods 
Important in Economic Dynamics. — It is in a later 
part of the study which deals with economic changes 

— the part which we shall call Economic Dynamics 

— that the differences between land and artificially 
made goods become prominent, and these differences 
will receive clue emphasis in their proper place. 
In studying the law which would govern economic 
society if no essential economic changes were taking 
place, — in reducing society, as it were, to a static 
state, — we find that there is a certain set of char- 
acteristics which land shares with those capital 
goods which are the products of human industry. 
In static studies it is best to group the productive 
instruments which men make with the one unmade 
good which nature furnishes and to recognize that 



VARIETIES OF ECONOMIC GOODS 37 

together they embody the permanent fund of pro- 
ductive wealth.^ 

Mobility an Attribute of Capital. — Even in a 
static society capital would be permanent, while 
particular capital goods would be perishable. In 
dynamic studies another quality of capital, as dis- 
tinguished from capital goods, comes into the fore- 
ground, namely, mobility. It is the power to move 
without loss from one industry to another. Goods 
cannot be thus moved with any freedom. A loom 
cannot be taken out of a woolen mill and made to 
do duty in a carpenter's shop, nor can a circular 
saw be made available in weaving. When the 
loom wears out and needs replacement, it is in the 
owner's power to procure either another loom or 
a circular saw, and if he chooses the latter alter- 
native, he causes capital to move into the wood- 
working business. A whaling ship would not be 
useful as a cotton mill; but much capital that was 
once invested in the whale fishery of New England 
has since found its way into manufacturing. The 
transfer can often be made without waste. If the 
earnings of an instrument have sufficed to replace 
it with another that is like it, they may suffice for 
producing an instrument that is unlike it. Waste, 
if it occurs, results from a failure of the original 
instrument to earn the fund for replacement. Capi- 
tal which thus abides but passes from one employ- 
ment to another is a body the identity and the 

^ What is commonly termed land contains elements which 
perish in the using. Such are deposits of coal, ores, or oil, 
and those ingredients of loam which are exhausted by tillage. 
Such elements of the soil are not land in the economic sense. 
How they should be regarded will be shown in a later chapter. 



38 ESSENTIALS OF ECONOMIC THEOEY 

character of whose component parts change. The 
transfer of capital from one industry to another is 
a dynamic phenomenon which is later to be con- 
sidered. What is here important is the fact that it 
is in the main accomplished without entailing trans- 
fers of capital goods. An instrument wears itself 
out in one industry, and instead of being succeeded 
by a like instrument in the same industry, it is suc- 
ceeded by one of a different kind which is used in 
a different branch of production. Goods have not 
moved from one branch to another, but capital has 
done so. 

How Capital itself may he Destroyed. — When we 
speak of capital as permanent, we mean that using 
does not destroy it as it destroys the tissues of which 
it is composed. Fires, earthquakes, and business 
disasters put parts of it out of existence and affect 
the volume of the fund as a whole; but production 
itself leaves it intact. It is this very production 
which destroys capital goods and makes it necessary 
to replace them. 



CHAPTER III 

THE MEASURE OF CONSUMERS' WEALTH 

In all stages of social development the economic 
motives that actuate men remain essentially the 
same. All men seek to get as much net service 
from material wealth as they can. The more wealth 
they have, other things remaining the same, the 
better off they are, and the more personal sacrifice 
they are compelled to undergo in the securing of 
the wealth, the worse off they are. Some of the 
benefit received is neutralized by the sacrifice in- 
curred; but there is a net surplus of gains not thus 
canceled by sacrifices, and the generic motive 
which may properly be called economic is the desire 
to make this surplus large. Except in a perfectly 
isolated individual life, there is opportunity for 
ethical motives to affect men's economic actions. 
Altruism has a place in any social system of econom- 
ics, and so have the sense of justice and the positive 
compulsion of the law. Altruism does its largest 
work in causing men to give away wealth after they 
have acquired it, but conscience and the law power- 
fully affect their actions in acquiring it. These 
are forces of which Social Economics has to take 
account; but the more egoistic motive, desire to 
secure the largest net benefit from the wealth-creat- 
ing process, is one of the premises of any economic 
science. This involves a general pursuit of wealth; 

39 



40 ESSENTIALS OF ECONOMIC THEOKY 

but men seek the wealth for a certain personal 
effect which comes from the use of it, and they measure 
it, when attained, by means of this subjective effect. 

How Specific Utilities are Measured. — As the 
essential quality of wealth is specific effective utility, 
we measure wealth by estimating the amount of 
this quality, and it is always a consumer who must 
make the measurement. He must discover the 
importance to himself of a small quantity of a par- 
ticular commodity. The hunter must find out 
how much worse off he would be if he were to lose 
a small part of his supply of game and endure some 
hunger as a consequence. In doing this he gets 
the measure of the effective utility of any like quantity 
of game, since any one specific part of his supply is 
as important as any other and no more so. The 
estimate of the importance of such a supply of food 
material has to be made in this specific way, by 
taking the amount on hand piece by piece, and not 
by gauging the importance of the whole of it at 
once. 

Value the Measure of Specific Effective Utility. — 
If any consumer will estimate the importance to 
himself of a single unit of goods of a certain kind, 
and multiply the measure so gained by the number 
of units he is appraising, he will make a measurement 
of the value of the total amount. 

Values not based on the Importance of the Total 
Supply of Goods. — It is essential that the consumer, 
in determining the value of a kind of goods, should 
not estimate the importance of the supply in its 
entirety, since that would give an exaggerated 
measure. Measurements of value are always made 
specifically, and single units of the supply of goods 



THE MEASURE OF CONSUMERS' WEALTH 41 

are appraised apart from the remainder. The 
total utility of atmospheric air is infinite, since the 
loss of the whole of it would mean the total de- 
struction of animal life ; but the specific utility and 
the value of air is nil, since no one limited part of 
the supply has any practical importance. A room- 
ful of it might be destroyed with impunity. So 
the cereal crops of the world, taken as a whole, have 
almost infinite importance, since their destruction 
would result in universal famine; but each bushel 
of grain has an importance that is relatively small. 
The loss of it would impose no serious hardship 
upon the average consumer, since he could easily 
replace it. The value of the crop is determined 
by the importance of one bushel taken separately 
and by the number of the bushels. If we estimate 
the importance of one unit of the supply of anything, 
express the result of the estimate in a number, and 
then multiply this by the number of units in the 
supply, we express the value of this total amount. 
The total utility of it, on the other hand, is measured 
by the benefit which we get from the supply in its 
entirety, or by the difference between the state we 
are in when we have it all and that to which we 
should be reduced if we lost it all and were unable 
to replace it. To measure any such total utility 
we contrast, in imagination, our condition with 
the full supply on hand and a condition of total 
and hopeless privation, in so far as these goods and 
similar ones are concerned. 

This Method of measuring Wealth Universal. — 
These principles apply as well to the economy of 
a solitary islander of the Crusoe type as they do 
to that of a civilized society. A Crusoe does not 



42 ESSENTIALS OF ECONOMIC THEORY 

need to measure values for purposes of exchange, 
but he has other reasons for measuring them. It 
is for his interest to use his own labor economically, 
and to that end he should not put too much of it 
into one occupation and too little into another. 
When, by reason of a large store of wheat on hand, 
the specific importance of it is small, — or, if we 
use a common expression, when the utility of the 
"final increment" of it, which a man might secure 
by making an addition to his supply, is small, — he 
should divert his labor to raising goats or building 
huts, where the utility of the increment of product 
to be gained is, for the time, greater. The solitary 
man thus well illustrates the act of the society which, 
in its own peculiar way, sends labor from one de- 
partment of industry where the "final utility" of 
its product is small to another where it is larger. 
It is all done by measuring the specific importance 
of goods. ^ 

The Utility of Producers^ Goods. — Consumers' 
goods have a direct utility, which is a power im- 
mediately to serve a consumer. Instruments of 
production, on the other hand, have indirect utility, 
since all that they are good for is to help produce 
things that render the immediate service. They 
have productivity, and this has to be measured in 
determining their value. What we need to know 
about hoes and shovels, hammers and anvils, spindles 
and looms, etc., is how much power they have to 

* For extended discussions of the relations of utility and 
value the reader is referred to the works of Jevons, Menger, 
Von Wieser, Von Bohm-Bawerk, and Walras. A study of 
"effective" utility and its relations to value, by the writer of 
the present treatise, is contained in the New Englander for 
July, 1881. 



THE MEASURE OF CONSUMERS' WEALTH 43 

create the goods that we want for consumption. 
Here again the measurement has to be made in the 
specific way. The capital goods have to be taken 
unit by unit if their value for productive purposes 
is to be rightly gauged. A part of a supply of pota- 
toes is traceable to the hoes that dig them; but in 
valuing the hoes we do not try to find out how much 
worse off we should be if we had no hoes at all. We 
endeavor simply to ascertain how badly the loss 
of one hoe would affect us or how much good the 
restoration of it would do us. This truth, like the 
foregoing ones, has a universal application in eco- 
nomics; for primitive men as well as civilized ones 
must estimate the specific productivity of the tools 
that they use, and make hoes, shovels, or axes ac- 
cording as the procuring of a single tool of one kind 
becomes more important than procuring one of 
another kind. Indeed, the measuring of the utility 
has to be done, as we shall soon see, in a way that 
is even more specific than this; for the man has to 
determine not only how many hoes he will make, 
but how good he shall make them. The quality 
of each tool has to be determined in a manner that 
we must hereafter examine with care. The earn- 
ing power of capital is, as we shall later see, goyerned 
by a specific power of productivity which resides in 
capital goods. 

Cost and Utility. — A ripe consumers' good, in 
exhausting itself on man, benefits him; but during 
the period in which it is being prepared for use, 
when it is receiving utilities at the hands of suc- 
cessive producers, it has an opposite relation to 
the men who handle it. In making the material 
useful a man confines and tires himself. He is 



.44 ESSENTIALS OF ECONOMIC THEORY 

willing to do it if the reward that he expects will 
more than pay for the sacrifice, but not otherwise. 
Moreover, this sacrifice itself has to be estimated 
specifically in a way that is akin to the method of 
measming utilities which determines the values 
of goods. It is necessary for a man to gauge the 
sacrifice which is entailed on him, not by his labor 
as a whole, but by a specific part of it. He finds 
himself in the evening feeling the fatigue and the 
sense of confinement which the day of labor has 
imposed and asks himself how much it would burden 
him to work a little longer. If what he can get by 
this means pays for the extra sacrifice involved in 
thus getting it, he will work for the few minutes, 
but otherwise he will not. His objection to a few 
minutes of additional work measures what we may 
call the specific disutility of labor; and men, whether 
they be primitive or civilized, are forever making 
such measurements. They consider how much it 
will cost them to add slightly to the length of their 
working day or how much it will benefit them to 
shorten it. In this way they measure the specific 
disutility of labor rather than the total disutility 
of it, since they do not gauge the relief that it would 
afford to cease working altogether. 

The Increasing Cost of Successive Periods of Labor. 
— It is easy to work when one is not tired, and the 
first hour or two of labor may even afford a pleasure 
that largely offsets the burden that it entails; but 
it is hard to work when one is tired and painfully 
conscious of the confinement of the shop. Adding 
anything to the length of a working day imposes 
on a man the necessity of working at the time when 
the burden is greatest; and shortening his day. 



THE MEASURE OF CONSUMERS' WEALTH 45 

for a like reason, relieves him of some of his most 
costly toil. 

The Natural Length of the Working Day. — Any 
laborer, as his work goes on, hour after hour, is 
certain to reach a point at which it is unprofitable 
to go farther. However greatly he may need more 
goods, he will not need them as much as he needs 
rest and change. It may be that he has worked 
twelve hours, and that, by working longer, he can 
improve his wardrobe, his food, or his furnishings; 
but if he has a tolerable supply of such things, he will 
hardly choose to add to it by staying in the shop 
when his strength has been exhausted and he is 
eager to reach his home. 

Specific Cost at its Maximum a Measure of Specific 
Utility. — Two very important principles are at 
work whenever a man is performing labor in order 
to create wealth. The more consumers' wealth he 
gets, the less important to him are the successive 
units of it, and the more do these successive units 
cost him. The tenth hour of labor adds to his 
supply of food, but this addition is not as important 
as the supplies that were already on hand. If we 
divide the supply into tenths and let the man pro- 
duce a tenth in each successive hour, the first tenth, 
which rescues him from starvation, is the most im- 
portant, while the last tenth, which comes nearest 
to glutting his appetite, is least important. This 
last increment, however, is produced by the greatest 
sacrifice, for it is gained by making the working day 
ten hours long instead of nine. 

Let the hours of the working day be counted 
along the line AD, and let us suppose that a man 
gets unit after unit of consumers' wealth, as he works 



46 



ESSENTIALS OF ECONOMIC THEORY 




hour after hour, and the units grow less and less 
important. The first and most important we may 
measure by the vertical line AB. The second is 
worth less, the third still less, and the last one is 

worth only the 
amount CD. This 
means that the suc- 
cessive units of 
what we may call 
general commodity 
for personal use 
have declined in 
utility along the 
curve BC. On the 
other hand, as the 
man's labor has 
been prolonged, it has grown more and more weary- 
ing and irksome. The sacrifice that it involved at 
first was almost nothing, but the sacrifice of the suc- 
ceeding hours has increased until, in the last hour, it 
amounts to the quantity expressed by CD.^ As the 
man has continued to work, the onerousness of work- 
ing has increased along the ascending line AC until 

* If we should try to 
describe all the possibili- 
ties in the case, we should 
take account of the fact 
that a man may get a 
positive pleasure from his 
first hour or two of labor 
and construct a figure 
thus to express this 
fact : — 

AC is the curve repre- 
senting the sacrifice en- 
tailed by successive hours 
of labor. 




THE MEASURE OF CONSUMERS' WEALTH 47 

the point has been reached where it is so great that 
it is barely compensated by the fruits of the labor. 
The man will then work no longer. If he were to do 
so, his sacrifice would become still larger and his 
reward still less. Up to this point it is profitable 
to work, for every hour of labor has brought him 
something so useful that it has more than paid for 
whatever sacrifice he has made in order to get it.' 
Beyond this point this is not the case. The line CD 
represents the cost of labor at its maximum, and it 
is this which acts as a measure of effective utility 
and value. 

The Coincident Measure of Cost and Utility. — 
It now appears that the line CD signifies two dif- 
ferent things. It measures the utility of the last 
unit of the man's consumers' wealth, and it also 
measures the sacrifice that he has incurred in order 
to get it. These are opposing influences, but are 
equally strong. The one, of itself, makes man better 
off, while the other, of itself alone, makes him worse 
off. At the last instant of the working day they 
neutralize each other, though in all the earlier periods 
the utility secured is greater than the sacrifice in- 
curred and the net gain thus secured has kept the 
man working. 

The Point at which Utility and Disutility are mu- 
tually Neutralizing. — At a certain test point, then, 

In like manner we should have to recognize the fact that 
the utihty of some kinds of goods may 
not reach a maximum with the first 
increment, and should construct a 
utility curve to express this fact. BC 
here represents the increase and the 
following decrease in the specific utility 
of the supply of an article of this kind. 



48 ESSENTIALS OF ECONOMIC THEORY 

production acts on man in such a way as exactly 
to offset the effect experienced from the consum- 
ing of the product. Man, as a consumer, has to 
measure a beneficial effect on himself, and, as a pro- 
ducer, he has to measure an unpleasant effect. He 
finds how much he is benefited by the last unit of 
wealth which he gets for personal use, and also how 
much he is burdened by the last bit of labor that 
he performs. If this sacrifice just offsets the benefit 
derived from the final consumption, it is the best 
unit for measuring all kinds of utilities. A man 
secures by means of this final and most costly labor 
a variety of things, for if he works up to this point 
every day in the year, he will have at his disposal, 
say, a hundred hours of labor in excess of what he 
would have had if he had worked a third of an hour 
less each day. The product of this extra labor 
will be taken in the shape of goods that are also 
extra, or additional to whatever he would otherwise 
have secured. They will represent special com- 
forts and luxuries of many kinds. The values of 
these goods may be measured and compared by 
means of the quantity of labor that the man has 
thought it worth while to perform in order to get 
them. If he values one of them highly enough to 
think it worth while to work for an extra period 
of twenty minutes at the end of a day in order to 
get it, it may be said to have one unit of value ; and 
if he is anxious enough to get something else by 
doing this on two successive days, this second article 
may be said to have two units of value. The savage 
who, by working for an extra hour, makes some 
improvement in his canoe, and by doing the same 
thing on another day makes some improvement in 



THE MEASUKE OF CONSUMERS' WEALTH 49 

his food, establishes thereby the fact that he values 
these two additional bits of consumers' wealth 
equally. If he uses ten hours of the same costly 
kind of labor in making an addition to his hut, he 
proves that he values that gain ten times as highly 
as he does either of the others. Establishing values 
by means of such final costs is a process that goes 
on in every stage of social evolution. 

Unlike Results of Creating Wealth and Using it 
Summarized. — Wealth, then, affects a man as a 
consumer in one way and the same man as a pro- 
ducer in an opposite way. In the one case the 
effects are favorable, and in the other they are un- 
favorable. At a certain test point the two effects 
may be equally strong as motives to action, and so 
may be said to be equivalent. The man is impelled 
to work by his desire for a final unit of wealth, and 
he is deterred from it by his aversion for the final 
unit of labor which he will have to incur if he secures 
the benefit. If he performs the labor and gets the 
benefit, he neither gains nor loses as the net result 
of this particular part of his labor, though from all 
other parts of his labor he gets a net surplus of benefit. 
It is natural to measure all such economic gains in 
terms of sacrifices incurred at the test point where 
these are greatest. This is the labor one would 
have to incur in order to add the means of gratifica- 
tion to his previous supply of consumers' goods. 

Minimum Gains offset Maximum Pains. — Run- 
ning through and through the economic process 
are these two different measuring operations. Man 
is forever estimating the amount of harm that wealth 
does him when he is in the act of producing it, and 
the amount of good it does him when he consumes 



50 ESSENTIALS OF ECONOMIC THEORY 

it ; and there is always to be found a point where the 
two amounts are equal. It is the point at which 
gains are smallest and sacrifices greatest. It is at 
this point that men measure values in primitive 
life and in civilized life. How in the intricate life 
of a modern society the measuring is done we shall 
in due time see; for the present it is enough that 
we perceive the universality of the law according 
to which value is best measured by the disutility 
of the labor which is most costly to the worker. 
Organized societies do something which is tan- 
tamount to this. It is as though the whole social 
organism were an individual counting the sacrifices 
of his most costly labor and getting therefrom a 
unit for comparing the effective utilities of different 
goods. 

How Primitive Man tests Value. — It is a mistake 
to suppose that what is essential in value depends 
on the existence of an actual market in which things 
are exchanged for each other. In a market, it is 
true, values are established and their amounts are 
expressed in ways that cannot be adopted in primi- 
tive life. When we buy a thing, we help to fix 
the value of it and of other things which are like it. 
'The mere ratios in which things exchange for each 
other in a market are, however, by no means the 
essence of value itself. That is something deeper 
and is one of the universal phenomena of wealth. 
Value, as we have said, is the measure of the effective 
utility of things, a kind of measure that every one 
is frequently compelled to employ, whether he is 
making goods for himself or buying them from 
others. A producer who has the option of making 
different things for himself needs to know what 



THE MEASURE OF CONSUMERS' WEALTH 51 

variety of goods can be increased in supply with the 
greatest advantage to himself as a consumer. Add- 
ing to the supply of any one of them is getting a 
"final" or "marginal" unit of consumers' wealth. 
It is something that is needed less than the things 
that were already on hand. Without making such 
a comparison of the importance of marginal units 
of different commodities he cannot use his resources 
in the way that will do him the most good.^ 

How Isolated Men measure Final Utility. — If 
a cave dweller possesses a store of one hundred 
measures of nuts, he measures the final utility and 
the value of this store in the manner which we have 
described. If he were to be deprived of the whole 
stock, he might starve, but this fact does not afford 



* The terms marginal and final mean essentially the same 
thing, but the modes of conceiving it differ. When utilities 
are thought of as supplied one after another, the last is the 
least important. We may represent a man's enlarging grati- 
fications, not by such a mere series 
of quantitative increments, but by 
an enlarging area. We may draw a 
series of concentric circles, begin- 
ning with the smallest, and let this 
central area inclose the most neces- 
sary forms of consumers' wealth. 
When we draw a second and larger 
circle, we inclose between it and the 
first one a zone which includes those 
forms which come next in impor- 
tance. By continuing to draw circles we reach an outermost 
one which bounds a zone in which are included the least im- 
portant of the consumer's acquisitions. These are the things 
which he gets with his costliest increment of labor, and the 
things which lie beyond the circle last drawn would not pay 
for the sacrifice which acquiring them would cost. In the 
accompaying figure the fifth zone includes these "marginal" 
forms of wealth. 




52 



ESSENTIALS OF ECONOMIC THEORY 



the basis of the value which he puts on the nuts. 
He measures the importance of this consumers' 
wealth specifically. He tests the effect of losing 
one measure and no more, and finds that he could 
lose the single measure without suffering greatly. 
The difference between having an appetite fully 
satiated and having it very nearly so is not serious. 

, Let AD represent the 
savage's total supply of 
food. AB will represent 
the utility of the first 
unit; CD of the hun- 
dredth. If we supply 
the food unit by unit, 
the utility of the suc- 
cessive increments will 
decline along the curve 
BC. When the man has 
a hundred units of food, no one unit of it is worth 
any more than the last one, since if any one were 
taken away, the last one could be put in the place 
of it. 

The total absolute utility of the food is measured 
by the area ABCD, but the total value will be rep- 
resented by the rectangle ADCE. The area EBC 
measures the surplus of utility contained in the 
earlier units in the series. 

The Motive for measuring Values in Primitive 
Life. — Even the cave dweller would have to measure 
values, and would thus have to apply the principle 
of final utility, because he would need to spend his 
limited productive energies in the way that would 
do him the most good. When he is nearly satiated 
with food, he needs other things more than he does 




THE MEASURE OF CONSUMERS' WEALTH 53 

food stuffs. If he has secured so much of one prod- 
uct that any additional amount that he may get 
by an hour's labor would be of less use to him than 
what he could get of some other product by the 
same amount of labor, it is important for him to 
change his occupation and prodtice that thing of 
which an additional unit — which will perhaps be 
the final unit of this more desirable article — has 
the higher degree of usefulness. 

Final Utility and Labor Cost. — On the supposition 
that a small store of roots and nuts were incapable 
of being replaced by any amount of effort and that 
no other food were to be had, the utility of it would 
be indefinitely great, since the man's life would 
depend on this one increment of food alone. A man 
would value that life-sustaining good for what 
it would do for him and without any reference to 
the amount of work he had performed in order to 
get it, or to the amount he would have to perform 
in order to get another store like it. On the sup- 
position that by labor the man could replace this 
essential supply, the effective utility of it would be 
gauged by the sacrifice he would have to make in 
order to replace it. The effective utility of any 
unit of a good that an hour's labor will produce can 
never be more than enough to offset the disutility 
of a marginal or final hour of labor; and thus even 
a single unit of replaceable food stuff, even when it 
stands alone and constitutes the whole supply, is 
valued according to the cost of getting another one 
like it. A man will prize it according to his dread 
of the sacrifice involved in getting the duplicate. 
If he gets this by adding an hour of labor to his day's 
work, this fact is an evidence that the importance 



54 ESSENTIALS OF ECONOMIC THEORY 

of the original supply of the food is measured and 
expressed by this personal cost of replacement; 
and as any similar quantity in a large supply of 
food can be duplicated by the same amount of labor, 
it appears that, by a standard based on cost, the 
effective utilities of all units are equal, that of each one 
is measured by the " disutility" of an hour's labor and 
that of the whole supply is this amount multiplied 
by the number of units that this supply contains.* 
How Primitive Man measures the Productivity of 

' Although we may use the terms final utility and effective 
utility in a way that makes them nearly interchangeable, 
it is clear that the qualities for which the two terms stand 
are by no means identical, and that effective utility must 
be studied in any complete analysis of value. In distinguish- 
ing final utility we assume that the units of the supply of 
goods of a particular kind are furnished one by one, and we 
measure the absolute utility of each unit. The line AB meas- 
ures the absolute utility of the first unit supplied. This meas- 
urement does not take any account 
of the cost of replacing this unit, 
for it does not recognize the pos- 
sibility of replacing it. What is 
estimated is the absolute impor- 
tance of the service which this first 
unit of the article renders, on the 
supposition that, if this first incre- 
ment of the supply were wanting, 
the service would not be rendered 
at all. It is, in like manner, the 
absolute utility of the successive increments supplied which 
declines along the curve BC. DC measures the absolute 
utility of the final increment, and the area A BCD the total 
absolute utility of the supply. If the goods can be repro- 
duced by labor, the total effective utility is less, since it is 
measured, as we have seen, by the amount of sacrifice which 
the replacing of one lost unit would entail multiplied by the 
number of units in the supply. It is the amount expressed 
by the area AECD which is the amount of the value of the 
goods, since measure of effective utility and value are the 




THE MEASURE OF CONSUMERS' WEALTH 55 

Labor and Capital. — There is a truth relating to 
producers' wealth that resembles the truth that we 
have just stated with regard to consumers' wealth. 
The more consumers' goods of one kind a man has, 
the less is the value that any one of them has to 
him. The more producers' goods of a given kind 
a man has, the less is the efficiency that any partic- 
ular one of them possesses as an aid to labor. The 
last bit of bread serves the man himself in a less 
important way than does the first, inasmuch as it 
gratifies a want that is less intense; and the last 
implement of a given kind — the last hatchet or 



same, both in the case of a single unit and in that of a 
total supply. 

We have discovered two reasons why the effective utility 
of any one of the earlier units is equal to the absolute utility 
of the final one. The first reason is that, if any one of them 
were lost, the final one would be put in the place of it and 
the consumer would suffer no loss except what would be 
entailed by going without the last unit. The second reason 
is that if the consumer should lose any one of the earlier units, 
he could replace it by the same amount of labor that would 
replace the final one. We have seen that the line DC of the 
figure expresses not only the absolute utility of the final 
unit of goods, but the disutility of the labor of reproducing 
it or of reproducing any other unit. The cost of replacing 
the whole supply is expressed by the area AECD, on the 
supposition that the units are replaced, one at a time, by 
means of labor performed at the end of several working days 
when the sacrifice is greatest. Total value is thus quanti- 
tatively equivalent to total effective sacrifice of replacement, 
as well as to total effective utility. If, by adding a brief 
period to the length of one working day, a man can make 
good the loss of one unit of the goods, by adding the same 
period to the length of a number of working days, he can make 
good the loss of the total supply. For simplicity we assume 
that the man's physical condition remains unchanged, and 
that an extra hour of labor at the end of any one day costs 
him as much as it would at the end of any other. 



56 ESSENTIALS OF ECONOMIC THEORY 

spade or arrow — helps him less in his productive 
operations than did the first one. On the one hand, 
we have the law of the diminishing utility of suc- 
cessive units of consumers' goods, and on the other 
hand, we have a parallel law of the diminishing pro- 
ductivity of successive increments of producers' goods. 
The Necessity for measuring the Productive Powers 
of Capital Goods even in Primitive Life. — Now, it 
is necessary for every producer, though living in 
the simplest possible manner, to measure in some 
way the efficiency of the last unit of each kind of 
productive instrument that he uses. He has, let 
us say, a certain number of hatchets and of arrows, 
and he can produce one hatchet with the same 
amount of labor that would produce an arrow. Now, 
if a hatchet will do more good than an arrow, he 
will direct his energies to the making of the hatchet. 
It is important that any producer should bring the 
final units of the different parts of his equipment 
to a certain uniformity of producing power. He 
must not go on adding to the stock of implement 
No. 1 when implement No. 2, which could be had 
by the same expenditure of labor, would do more 
good; nor must he add to the stock of either of 
these after he has acquired such a supply of them 
that the first unit of implement No. 3 would be of 
greater importance. Measuring the efficiency of 
producers' goods is necessary in the case of every 
one who creates wealth at all, and such measurements 
reveal the fact that the more producers' goods of 
one kind a man has, the less is the productive power 
that resides in one of them.^ 

' The law of diminishing returns of successive units of 
capital goods is based on the same principle as the law of 



THE MEASURE OF CONSUMERS' WEALTH 57 

The Foregoing Truths Universal. — All the general 
facts which have been thus far stated hold true 
wherever wealth is produced. They do not pre- 
suppose the facts of a division of labor and a system 
of exchanges, and they do not even require that 
there should be any social organization. Men in 
the most primitive tribes and even men living in 
Crusoe-like isolation would create wealth by labor 
aided by capital. The essence of that wealth would 
be effective utility, and the measure of this, which 
is value, would be made in the specific way that we 
have described. The varieties of capital, the dis- 
tinction between capital and capital goods, and the 
law of diminishing productivity of such goods would 
appear in the most primitive economics as well as 
in the most advanced. These are by no means 
all of the facts and principles which are thus of 
universal application. They are merely a few of 
the more important and may serve as a foundation 
or a "Grundlegung," for further study. If we 
should extend our list of general and basic truths, 
it would quickly appear that the incomes that have 
been treated as rent and the various surplus gains 
which are analogous to rent are universal economic 
phenomena which it would be not illogical to discuss 
in the preliminary part of this treatise. What has 
been stated, however, concerning the laws of di- 
minishing productivity of successive units of pro- 
ducers' wealth, concerning the diminishing utility 

diminishing returns of capital, but it is not identical with it. 
We shall see, in due time, how a permanent fund of producers' 
wealth actually grows and why each new unit, as it adds 
itself to the fund, creates a smaller income than did its prede- 
cessor. 



58 ESSENTIALS OF ECONOMIC THEOKY 

of successive units of consumers' wealth, and also 
concerning the increasing burdensomeness of con- 
tinuous hours of labor, presents the essential prin- 
ciples on which all rents and quasi-rents rest. It 
is best to study the applications of these principles 
as they are made in a civilized state. 

Universal Economic Truths independent of the 
Special Facts of Sociology. — This first division of 
economic science borrows none of its premises from 
sociology, for the truths which compose it would 
abide if there were no society in existence. Basic 
facts it takes from Physics, Biology, Psychology, 
Chemistry, etc. Facts concerning man, nature, and 
the relation between them are material for it, but 
relations between man and man come into view only 
in the later divisions. There, indeed, they do come 
into the very foreground with results which im- 
measurably enrich the science. What we may call 
the socialization of the economic process we shall 
have next before us, and we shall find it full of critical 
problems involving the future well-being of humanity. 
Industry is carried on by a social organism in which 
men are atomic parts and to which nature has given 
a constitution with laws of action and development. 
We have first to study the nature of this industrial 
organism and the mode in which it would act if it 
were not subject to any constitutional change; and 
later we must study it in its process of growth. 
The economic action of a society which is under- 
going no organic changes is the subject of Social 
Economic Statics, while such changes with their 
causes and effects constitute the subject of the 
science of Social Economic Dynamics. 



CHAPTER IV 

THE SOCIALIZATION OF INDUSTRY 

We have now before us a few principles of so 
general a kind that they apply to the economy of 
the most primitive state as well as to that of the 
most advanced. It is not necessary that men 
should live in any particular relation to each other, 
in order that, in creating and consuming wealth, 
they should exemplify these principles. They would 
do this even though they never came into touch 
with each other, but lived, as best they could, each 
man on his solitary farm. Laws of this general 
kind result from man's relation to nature, and not 
at all from the relation of different men to each other. 
Let a man keep wholly aloof from other men, apply 
his labor directly to nature, and he can produce 
wealth of the various kinds that we have described. 
He can secure food, clothing, and other things for 
his own use, and he can make tools to help him in 
securing them. He will appraise the consumers' 
goods according to the law of what has been called 
final utility or, in another view, effective specific 
utility, and he will also test the comparative use- 
fulness of his various tools by an appeal to the law 
of final or specific productivity. 

Social Economy the Chief Subject of Study. — We 
care most to know how an organized society pro- 
duces and uses its wealth, and in making this inquiry 
we encounter at once phenomena that are not uni- 

69 



60 ESSENTIALS OF ECONOMIC THEORY 

versal. The civilized society creates its wealth 
cooperatively, by the joint action of its various 
members; that is, it proceeds by means of a divi- 
sion of labor and an exchanging of products. More- 
over, it has, in some way, to share the sum total of 
its gains among its various members. It has to 
apportion labor among different occupations for 
the sake of collective production, which is a grand 
synthetic operation whereby each man puts some- 
thing into a common total which is the income of 
all society. It has, further, to divide the grand 
total into shares for its different members — an 
analytical operation in which each man takes some- 
thing out of the aggregate for his personal use. 
This is distribution in the narrower sense of that 
term — the apportionment among the members 
of a civilized society of the fruits of production. In 
the wider sense the term also includes the appor- 
tionment of the sacrifices incurred in the joint pro- 
duction. Distribution, as thus defined, is the ele- 
ment that appears in economic life in consequence 
of social organization. This is a secondary element, 
indeed; for man, nature and their relations and 
interactions are the primary facts, and the relations 
of men to each other come logically after these. 
Social organization, however, is so transforming 
in its effects as to reduce to small proportions the 
amount of attention it is worth our while to devote 
to the economy of the primitive types of life. It 
is necessary to make some study of that economy, 
for it is thus that we place before ourselves the 
fact that there are universal economic laws and 
perceive distinctly the nature of some of the more 
important of them. 



THE SOCIALIZATION OF INDUSTRY 61 

Facts Peculiar to Socialized Industry. — The term 
Political Economy denotes a science of industry* 
as thus sociahzed, for it is a science of the wealth 
which is produced in an organized way by the people 
of a more or less civilized state. The general truths 
which we have thus far stated apply to such an 
economy, indeed, but they also apply to the wealth- 
creating and wealth-consuming processes of un-- 
civilized peoples, and even of isolated individuals 
who have no dealings with each other. They are 
truths of Economics in the unrestricted sense, and 
we have now to study the special truths of Political 
Economy. When production goes on by division 
of labor, as when one man works at one occupation 
and another at another, phenomena appear that do 
not appear in more primitive life; and still others 
appear when, within each occupation, there is a 
division of functions between the laborer and the 
capitalist, as is the case whenever one set of men 
furnish tools of production and another set do the 
work. The special laws of this highly developed 
economic system require far more extended study 
than do those more general laws which are common 
to, it and simpler systems. We now continue to 
recognize the universal and basic truths which have 
been stated in the foregoing chapters and proceed 
to the study of the special principles which apply 
only to organized economic life. 

Specialized Production the Means of Diversified 
Consumption. — As the kinds of goods that we 
individually make become fewer, the things which 
we get and use become more numerous and varied 

^We use this term in a broad sense, including agriculture 
and commerce as well as manufacturing. 



62 ESSENTIALS OF ECONOMIC THEORY 

— such is the law of economic speciahzation. So- 
ciety as a whole produces aii infinite variety of 
things, and the individual member of it secures for 
himself goods of very many kinds. The typical 
modern worker is, in his production, a very narrow 
specialist, but in his consumption he is far less a 
specialist than was the rude hunter who was able 
to enjoy only the few goods which he himself pro- 
duced. The modern worker's tastes are omnivorous, 
for he has developed an immense variety of wants 
and, through social organization, he has acquired 
the means of satisfying many of them. 

The Position of Individuals in the Producing Or- 
ganism. — When we say that production has been 
socialized, we mean something very far-reaching. 
We mean that an organization has grown up in 
which men are members or parts of members, and 
that this great organization has undertaken to do 
the productive work for all the individuals that 
compose it. For the first time we now recognize 
a sociological fact among the premises of economic 
science. When men, whose predecessors may have 
lived in isolated families or in a society organized 
for defense or for the mere pleasures of association, 
now develop a truly economic society, the individual 
depends on other individuals as well as on nature for 
the supply of his wants. Economic independence 
gives way to interdependence, because the fortune of 
each man is largely dependent, not merely on his own 
efforts, but on the relations which he sustains to other 
men. Simple laws of nature still largely control his 
income, but social laws also have a certain control 
over it. 

Exchanges in their Primitive Stage. — The exchang- 



THE SOCIALIZATION OF INDUSTEY 63 

ing of products is, of course, the process with which 
the organization begins, and this process is intro- 
duced by easy and natural stages. The man who at 
first makes everything for himself develops a particular 
aptitude for making some one thing ; and, though he 
may still continue to make most things for himself, 
he finds it advantageous to barter off a part of the 
supply of the one article for the making of which he 
is especially well fitted. He seeks out a neighbor 
whose special aptitude lies in a different direction and 
who has a surplus of some other article. It may be 
that one is a successful fisherman and the other is, 
by preference, a maker of clothing, and that they can 
get a mutual benefit by an exchange of food for 
raiment.^ 

The Intermediate Type of Exchanges and the Final 
One. — In the next stage a man becomes wholly a 
specialist, making one kind of product only and bar- 
tering it away for others. It might seem, at the 
first glance, that differentiation has now done its 
full work; but it is very far from having done so. 
Making one complete good for consumption is still 
a complex operation, which can advantageously be 
subdivided in such a way that one man produces a 
raw material while another works it up into a useful 
shape. A gain may be made by a further division of 
the manufacturing process, whereby the first worker 
makes only the rawest material, another fashions it 

^ If we were giving a history of the division of labor, we 
should have to record the effects of differences of climate 
and of agricultural and mineral resources in occasioning, at 
an early period, a territorial division of labor. We are here 
describing the division of labor which occurs within a society 
and in consequence of what may be called social economic 
causes. 



64 ESSENTIALS OF ECONOMIC THEORY 

somewhat, a third carries the process farther, and a 
fourth or a still later one completes it. In modern 
industry the material must often pass through very- 
many hands before it is ready to be made over to the 
consumer. Each man in the series puts a touch on 
it and passes it on to his successor. 

K'" 

A' 

A 

A!" is an article of consumers' wealth and A is 
the rawest material that enters into it. A' is this 
material somewhat transformed; A'' is the same 
material after it has received the second transforma- 
tion and needs only a final touch to convert it into 
K'" , in which state it will be ready for the consumer's 
use. We have here a symbol of what is actually 
taking place in the industry of the world. Cattle 
are grazing on western ranches; hides are tanning 
in the woods of Pennsylvania ; leather is going through 
the many changes that fashion it into shoes in the 
mills of Brockton; shoes are arranged on the shelves 
of retailers in New York in readiness for the people 
who are to wear them. These are stages in the mak- 
ing of a single product, and a thousand different 
products are coming into existence in a like way. 

A Representation of the Groups, or Specific Indus- 
tries, which compose Economic Society. — If we put 
beside the series of A's a series of B's and one of C's, 
we have a much simplified representation of what is 
actually taking place. There are, in reality, a myriad 
of different things which almost every consumer uses, 
and every one of them is made by a series of pro- 
ductive operations like the one we have described. 



THE SOCIALIZATION OF INDUSTRY 65 

The very fact that there are so many of them that it 
is hopeless to. try to represent them all in the table 
makes it desirable to illustrate the principle by tabu- 
lating only a few and to assume that these few are all 
that there are. For the purposes that we have in 
mind it is entirely safe to suppose that a series of 
A's, one of B's, and one of C's represent all the 
consumers' goods that society uses. What we wish 
to ascertain is how the different series work together 
to furnish an income for each member of society. 

The Organization Spontaneous. — Laborers can go 
where they will, and yet they are in some way brought 
into an orderly relation to each other, being placed in 
certain proportions in different industries. Capital- 
ists also are free to invest their funds as they will, 
and yet there is a certain amount that is naturally 
devoted to each branch of business. How this ap- 
portionment takes place we can most readily ascertain 
by creating such an imaginary and very much sim- 
plified society as this table furnishes. 

A'" B'" C" 

A'' B'' Q" 

A! W C 

ABC 
The series of A's, which we have already studied, 
represents one kind of raw material ripening into a 
finished product. B represents a second kind of 
raw material, which, like the A, is produced by its 
own set of workers and is then passed on to a second, 
who transform it into B' — a partly finished product. 
These then pass it on, as the corresponding set of men 
passed on the A'. They hand it over to a set of 
workmen who change it into B", a nearly completed 
product, and these hand it over to men at B'", who, 



66 ESSENTIALS OF ECONOMIC THEORY 

by giving the final fashioning, bring it into the form 
of a finished consumers' good. The C's represent 
another general group of workers who transform the 
raw material, C, into the finished product, C". 

Industrial Groups and Subgroups. — Each of these 
more general bodies of workmen and employers, 
such as the entire series of A's, we may call an in- 
dustrial group, and the divisions within each of them, 
such as A' or A'', we may term subgroups. The 
product of a group is a complete article, while that 
of a subgroup is not a complete article nor any part 
of an article that can be taken bodily from it. Yet 
it is a distinguishable element in the article. The 
product of the shoe factory is certainly not complete 
shoes, for the owners of the factory buy leather which 
has already passed through the hands of tanners; 
and the tanners themselves bought it in the shape of 
raw hides, which were furnished by still earlier pro- 
ducers. What the shoe factory has done is to impart 
a new utility to dressed leather by transforming it 
into shoes. It would be impossible ever to get that 
utility out again, or to point to any one part of the 
shoe as the only part that contains it. What the 
factory has really made is therefore a utility — a 
distinguishable quality which pervades a concrete 
thing. It makes the difference between the leather 
and the shoes. What the tanner has created is, in 
like manner, another utility, which makes the differ- 
ence between raw hides and leather. Groups, then, 
in their entirety produce whole articles for direct 
use, while subgroups produce distinguishable utilities 
which are embodied in such articles. The sum 
total of all the different utilities constitutes the 
article. It is a complex of useful qualities held 



THE SOCIALIZATION OF INDUSTRY 67 

together by the fact that they are attached to the 
same original, matter. 

Proportionate Production. — All the subgroups 
working together in an orderly way not only produce 
the consumers' wealth that society needs, but pro- 
duce the different kinds of consumers' goods in nicely 
adjusted proportions. Unless the general order of the 
group system is disturbed, there is a normal amount 
of A"' put on the market and also normal amounts 
of B"' and C". This result is attained by influences 
that run through the productive organism and bring 
about an adjustment of the comparative amounts 
of labor in the different occupations. If competition 
worked quite freely, this adjustment would be so nice 
that no military apportionment of forces among 
different brigades, regiments, etc., made consciously 
and by the most intelligent commanding officer, 
could surpass the perfection of it. There would be 
also an equally fine adjustment of the comparative 
amounts of capital devoted to different industries. 
In the actual productive organism each man goes 
where he will — capitalist, laborer, and employer of 
capital and labor alike. Each man acts in this re- 
spect as though there were no such thing as coercion, 
and as though he might, with unchecked freedom, do 
solely what is good in his own sight. By reason of the 
fact that all are seeking to produce what they can in 
order that they may get what they can, there comes 
into operation an organic law which brings the groups 
and subgroups into a delicate balance, in point of 
size and output, whereby the grand total of force 
that society commands is prevented from making 
too much of one product and too little of another, 
and is made to do its utmost in getting a large sum 



68 ESSENTIALS OF ECONOMIC THEORY 

total of wealth for the benefit of its various mem- 
bers. 

What the "Division of Labor" Involves. — This is 
the real signification of what it has been common to 
call the division of labor. It is the socialization of 
labor, or the gathering of isolated laborers into a great 
organism that, entirely without coercion, determines 
in some way what each one shall do, and not only 
makes the product of the whole a myriadfold greater 
than without any organization it could be, but causes 
this product to take certain well-adjusted shapes 
which, as we shall later see, serve consumers better 
than they could be served by products in misadjusted 
proportions. 

Capital as well as Labor Apportioned. — As we have 
said, there is a corresponding division of capital or 
an assignment of different parts of the total fund to 
different employments ; and this is made in the same 
way as is the division of labor and results in an equally 
nice adjustment. Each bit of capital, like each work- 
man, becomes, as it were, a specialist. It may take 
the shape of an instrument which is capable of per- 
forming only its one service, like the loom, which is 
capable of doing nothing except weaving; but even 
if the tool is somewhat adaptable, like a hammer 
which can be used in several trades, it is, as it were, 
stationed in one trade and held, by economic influ- 
ences, at that one point in the system. The house 
carpenter keeps his hammer though the cabinet 
maker could use it. Each bit of capital helps to 
create a particular utility, and the number of units 
of the fund that each subgroup contains is, as we 
shall see, so arranged as to enable the fund as a whole 
to do its utmost for the general good. It is all 



THE SOCIALIZATION OF INDUSTRY 69 

without the use of force, since each bit of capital does 
what its owner pleases to have it do. 

A Government Presupposed. — Of course there 
must be a government over it all. Such a method of 
producing wealth could never continue unless property 
were secure and unless it were made so without much 
effort on the part of its owners. A blacksmith who 
should have at one moment to use his hammer as 
a tool and at another to wield it as a weapon of defense 
could make but poor headway, and a society in which 
such a state of things existed in various trades would 
be too anarchic to permit the elaborate division of 
trades which is the key to success in industry. The 
most noticeable fact about organized production is 
that man is forever letting go the thing he has made 
or helped to make and allowing it to pass out of sight 
and reach without losing or greatly imperiling his 
title to the amount of wealth it represents. He casts 
his bread on the waters, but they bring him a return 
for it. Under these circumstances it is impossible 
for him to protect his product as the savage protects 
his tools, his clothing, and his hut. What a modern 
worker makes passes into the hands of other men and 
gets . completely out of the maker's direct personal 
control. If he wanted it again, he could never find 
it ; and if he could find it, it would be in a new shape 
and other men would have claims upon it. The man 
who has sold some hides that in the end have become 
shoes can hardly identify his product on the shelves 
of retail shoe dealers all over the country, or per- 
haps all over the world. If by a miracle he could 
find the particular bits of leather that in their raw 
stage he himself has furnished, they would be in new 
and far more valuable forms than they were when he 



70 ESSENTIALS OF ECONOMIC THEORY 

had possession of them. The shoes contain utilities 
which the man who furnished the hides cannot claim 
to have created. They have been changed and im- 
proved by elements contributed by many other 
persons, such as manufacturers, carriers, merchants, 
etc., and he could never carry away the concrete 
thing that he himself produced without carrying 
with it other men's property. 

The Surrendering of Goods and the Retention of 
Values Features of Social Industry. — Socialization 
of industry means, then, that individuals forego all 
effort to retain their own concrete products, but that 
they retain certain parts of the value of the products 
to which they have made contributions. The value 
of A''' when it is sold is claimed by men at A'", A", 
A', and A according to some principle. The values of 
B'" and C"' can be followed until they reach the 
pockets of the men who have contributed their 
several shares to the making of these things. All 
this requires a government and a well-developed sys- 
tem of laws and courts for the protection of property, 
including the protection of it in the form of a claim to 
a value that is embodied in things which have gone 
beyond the maker's reach. Property here takes a 
refined form which requires that the man should forego 
all desire to keep the literal thing he has made and 
should make it his aim to retain the value of it in some 
other form. It is a comparatively simple matter to 
guard a concrete article which a man has in his pos- 
session, though even that requires some energy on the 
part of the police force and is never quite perfectly 
accomplished ; but it is a far more difficult matter to 
enforce a claim that a man has against other men, 
in consequence of some utility that has been created 



THE SOCIALIZATION OF INDUSTRY 71 

by him but has gone away from him and mingled with 
utiHties created by many other persons in a product 
that the maii will never see. It is the problem of 
guaranteeing to the shoemaker the due return for 
the stitches he has put into shoes when the shoes 
themselves have gone to buyers and wearers in every 
quarter of the land and many quarters of the globe. 

Groups under a Socialistic State. — In 'political 
economy as distinct from general economy we take 
one premise from sociology and another from politics. 
We assume that society exists and that it has taken 
on a political character, by establishing laws with 
courts to interpret them and officials to enforce them. 
We do not, however, assume that the direction of 
industrial affairs is in the hands of such officials. In ^ 
the main indus try is organized in_a spontaneou sjsyay. 
Men choose such occupations as they like, and when 
there are too many of them in one group and too few 
in another, the rewards naturally increase in the 
group where a larger force is needed, and this lures 
men in that direction. 

In a socialistic society such adjustments would be 
made under the direction of the state. Officials 
would have to decide when more workers are needed in 
the A series and less in the B series and would have 
to use either inducements or some kind of compulsion 
in order to move them from the one group to the other. 
What we actually have to deal with is a society that 
shapes itself by the free acts of individuals, and we 
have to see how, in this way, it organizes itself for 
production and divides among different claimants the 
product that, by the joint action of all of them, it 
creates. 

Gains from the Organization of Industry. — The 



72 ESSENTIALS OF ECONOMIC THEORY 

advantages of the division of labor consist in an 
increase in the quantity of products and in an im- 
provement in their quahty, and the quantitative gain 
is almost beyond computing. The advantage appears 
mainly in the middle and upper subgroups of the 
series, which transform the materials, rather than in 
the lower subgroups, which produce them; and yet 
there is a gain everywhere from such organization. 
A man produces far more when he performs the same 
operation many times than when he goes through a 
whole series of unlike operations. Moreover, he can 
perform the single operation far more accurately 
and can thus attain a more perfect result. He can 
learn his minute trade more easily than he could a 
complex one. Where unusual strength or skill is 
required, the work may be given to persons who have 
the requisite quality so that a good product can be 
insured, and none of the labor of these superior 
workers will need to be wasted on work which inferior 
labor can perfectly well perform. 

Improvement in the Forms of Capital. — The great- 
est of all the advantages that come from this division 
and subdivision of wealth-creating processes comes 
in the way of applying machinery. A machine is a 
hopeless specialist and can, as a rule, put only a single 
minute touch on the material submitted to it; and 
the introduction of machines differentiates capital in 
a way that is parallel to the minute subdivision of 
labor. If the machine is to work at all economically, 
it must put its touch quickly on one after another 
of a series of articles, as they are submitted to it 
in uninterrupted succession. If only one kind of 
machine were employed in the making of shoes — 
if, for instance, the sewing of the uppers to the soles 



THE SOCIALIZATION OF INDUSTRY 73 

were done on sewing machines, even though all the 
rest were done by hand — it would be natural and 
almost necessary to have one class of workers to pre- 
pare the uppers, a.nother to prepare the soles, and a 
third to sew them together by aid of the machine. 
When the several stages of the process are thus given 
over to different classes of workers, the situation is 
ripe for the application of more machines, and in- 
ventors readily devise apparatus that will perform 
one or another minute part of the manufacturing 
process. In the end most branches of manufacture 
take such shapes that the raw material is intrusted 
to a series of machines and passes from one to another 
by a nearly continuous movement, till it emerges 
from the hands of these automata as complete as any 
manipulation can make it and ready for the merchants 
who will convey it to their customers. 

Economy of Capital. — There is an economy of 
capital involved in the fact that instruments can be 
used thus continuously. A worker does not have to 
have several sets of tools, many of which would be 
idle the greater part of the time, as would be the case 
if the man performed several unlike operations; but 
the greatest economy comes from the energy, rapidity, 
and accuracy with which the new instruments act. 
The tools are far more efficient than they could be if 
human muscles furnished the power and eyes and 
nerves supplied the deftness and accuracy that the 
making of the goods requires. Automata which 
men set working excel hand tools with men wielding 
them by a greater ratio than can be calculated. 



CHAPTER V 

PRODUCTION A SYNTHESIS ; DISTRIBUTION AN ANALYSIS 

The essential fact about production, as it is carried 
on by all society, is that it is a synthetic operation, 
by which a grand total is made up by the contribu- 
tions of different industries. There is a corresponding 
fact about the production which is carried on within 
a particular line of business, or, as we should express 
it, within a particular subgroup ; for within the sub- 
group there are laborers, on the one hand, and capi- 
talists, on the other, helping each other to make a 
joint product. In our table A"' , W , and C" are 
the goods of which the social income is composed. 
Subgroups, such as A, A', etc., help to make this 
grand total of finished goods ; but in A, A', and all the 
other subdivisions there are laborers and capitalists 
working together. Farming, mining, cotton spinning, 
shoemaking, building, and a myriad of other occupa- 
tions all work together to create an aggregate of goods 
which constitute the social income. In each of these 
branches of business there are men and working appli- 
ances contributing each a part to the quota that this 
branch furnishes. 

Distribution as an Analysis. — The essential fact 
about distribution is that it is an analysis. It re- 
verses the synthetic operation step by step, resolving 
the grand total produced by society into shares corre- 
sponding with the amounts contributed by the 
specific industries, such as mining, cotton spinning, 

74 



PRODUCTION A SYNTHESIS 75 

shoemaking, etc. The men who own and work the 
mines do not keep the ore they secure, nor do they wish 
to keep it. The ore goes into a stock of goods for the 
general use of society, and it constitutes a definite 
addition to the value of that stock. As ore it is trans- 
muted into a myriad of forms, merged with other ma- 
terials and lost ; but the amount that it adds to the total 
product of society is definite. It is a certain definable 
quantity of wealth, and that quantity of wealth the 
producers of the ore should get for themselves. Dis- 
tribution further resolves the share of each particular 
industry into final portions for the use of the labor- 
ers and capitalists in that industry; and these 
correspond with the amounts which these laborers 
and capitalists contribute. The result of distribution 
is to fix the rate of wages, the rate of interest, and the 
amount of the profits of employers, if such profits 
exist; and the general thesis which is here advanced 
and remains to be proved is that, if society were with- 
out changes and disturbances, if competition were 
absolutely free, and if labor and capital were so mobile 
that the slightest inducement would cause them to 
pass from one branch of business to another,^ there 

^ It will be seen that we here assume for the process known 
as competition a degree of perfection which it does not attain 
in actual life. This process would be absolutely free if labor 
could and would instantly abandon one industry and enter 
another whenever it appeared that it could create an increased 
product by so doing, and if capital also moved with the same 
promptness on the smallest inducement. In actual life there 
is friction to be overcome in the making of such transfers, 
and this constitutes one of the subjects of the theory of Eco- 
nomic Dynamics and will in later chapters be fully considered. 

Whenever either labor or capital thus moves to a new 
place in the group system, it becomes an active competitor 
of the labor or capital that was already there. We need 



76 ESSENTIALS OF ECONOMIC THEORY 

a definition of the competing process. In the case of produc- 
ing agents it consists in a rivalry in selhng. The laborer 
who moves from A' of the table that, in the preceding chapter, 
has been used to represent organized industry to B', offers 
for sale, as some would say, his service, or more accurately, 
the product which his labor can create. The purchasers 
are the employers in the subgroup B', and in order to induce 
them to accept the new labor it is necessary to offer it at a rate 
of pay which will make it worth their while to take it. If 
the workers already in this division of the field are getting 
just what they are worth, a larger force cannot be employed 
at the same rate of wages, because, for a reason that wiU 
later appear, the new labor cannot offer for sale as large a 
product as an equal amount of the labor that is already there. 
If the transfer to B' were made, the new labor would have 
to accept lower pay than the old has been getting, and the old 
labor would be forced to accept a cut in its rate of pay or be 
supplanted by the new. A rate sufficiently low would in- 
sure the employment of all. If the labor formerly in this 
subgroup has been getting less than it is worth, there will 
ensue a competition among employers who desire to realize, 
each for himself, the margin of profit which can be made by 
getting additional labor, and this will either raise the pay 
of the men already in this subgroup or call new men into it, 
or do both. In any case it will, in the absence of all trace of 
monopoly on the side of the employers, end by giving to the 
men what they are worth. It is, in fact, such a bidding for 
new labor by employers in any branch of business that moves 
labor from point to point in the industrial system. The 
entrepreneur is the agent in the case, profits are the lure, and 
competition — rivalry in buying — is the means ; and com- 
petition is, as we use terms, absolutely free whenever it is 
certain that the smallest margin of net profit will set it working 
and draw labor or capital to the profit-yielding point. 

There is competition among the entrepreneurs at A'" in 
selling this finished product to the consuming public, and 
among difi"erent purchasers in buying it. Whenever the 
price of A'" is so high that the whole output of it cannot be 
sold, each vender tries to supplant others and insure a sale of 
his own product rather than that of any one else. Com- 
petition here is overt and active. When all can be sold at 
the current price, finding a market for one vender's supply 
does not require that he win away another's customers, and 
although the different sellers continue to be rivals and each 



PRODUCTION A SYNTHESIS 77 

would be no true profits ^ in any business, and labor 
and capital .would create and get the whole social 
income. Moreover, each laborer and each capitalist 
would get the amount of his personal contribution to 
this sum total. Amid all the complications of society 
the modern worker would be in a position akin to that 
of the solitary hunter in a primitive forest — his 
income would be essentially of his own making and 
would include all that he makes. He would not, 
like the primitive man, get the literal things that he 
fashions, but he would get the amount of wealth that 
he creates — the value of the literal products which 
take shape under his hand. 
Standards of Wages and Interest. — This accurate 

would welcome an increase of patronage made at others' 
cost, no one is forced to underbid others in order to continue 
to sell his accustomed output. Competition is here quiescent, 
since actual underbidding and the luring away of rivals' 
customers do not take place. When entrepreneurs who 
are not now in the subgroup A'" are ready to enter it and 
to become rivals of those already there whenever any profit 
is to be had by such a course, their competition is not actual 
but potential; and yet it is a real influence and serves to 
deter producers already in the field from establishing such 
a price for their product that the possible competitors will 
become real and active ones. These three influences may 
conceivably act without obstruction or may be hindered and 
deprived of much of their power. In actual life they are 
subjected to hindrances, and whether they shall hereafter 
insure a certain approximation to the general state which 
a perfectly free competition would insure or whether the eco- 
nomic condition of the world shall be permitted to drift far 
from that normal state, depends on the success which gov- 
ernments will have in reducing or removing the hindrances. 

* In this treatise the term profits will be used to designate 
the net increase which may remain in employers' hands after 
paying the wages of labor of every kind and interest on all 
capital used. The term gross profits describes a sum made 
up of this net profit and interest on the capital. 



78 ESSENTIALS OF ECONOMIC THEORY 

correspondence between men's incomes and their 
contributions to the general earnings of society would 
exist only in the absence of certain changes and dis- 
turbances which it will be our aim, in the latter part 
of this work, to study. These changes give to society 
the quality that we shall term dynamic, and we shall 
examine them at length. What can, however, be 
asserted in advance is that the rates of wages and 
interest which would prevail if the changes and dis- 
turbances were entirely absent constitute standards 
toward which, in spite of all the changes that are 
going on, actual wages and interest are continually 
tending. How nearly in practice the earnings of 
labor and capital approximate the ideal rates which 
perfect competition would establish is a question 
which it is not necessary at this point to raise. We 
have to define the standard rates and show that 
fundamental forces impel the actual rates toward 
them. The waters of a pond have an ideal level 
toward which they tend under the action of gravity; 
and though a gale were to force them to one end of the 
pond and cause the surface there to stand much higher 
than the surface at the other end, the standard level 
would be unaffected and the steady force of gravity 
would all the while be drawing the actual surface 
toward it. In our study of Economic Dynamics we 
shall encounter influences which act like the gale in 
the illustration, but at present we are studying what 
is more akin to gravity — a fundamental and steady 
force drawing wages and interest toward certain 
definable levels. In our present study of Economic 
Statics we must seek to discover how these standards 
are fixed, in the midst of the overturnings which 
industrial society undergoes. 



PRODUCTION A SYNTHESIS 79 



A'" 


B'" 


Qtn 


W 


A." . 


W 


Q,r 


H" 


A' 


B' 


C 


H' 


A 


B 


C 


H 



We have already represented, in a highly simplified 
form, the synthesis by which the goods which make 
up the income of society are produced. A, B, and C 
represent different raw materials, and they are changed 
by a series of transmutations into K'" , W , and C" , 
which stand for all the consumers' goods that the 
society uses. They represent food, clothing, furnish- 
ings, vehicles, and countless means of comfort and 
pleasure. 

The Making of Active Instruments of Production. — 
It is necessary always to have and use a stock of 
tools, machines, buildings, and other active instruments 
of production; and as these wear out in the using, it 
is necessary that there should be persons who occupy 
themselves in keeping the stock replenished. Under 
a system of division of labor there would be special 
industries devoted to the making of new appliances of 
production to take the place of those which are worn 
out and discarded, and also to make repairs on those 
which are still in use. For illustration, we may let 
the symbol W represent all active capital goods 
that the society uses, the various raw materials which 
enter into such active goods being represented by H 
and the partly made instruments by H' and H''. 
If the stock of appliances is not growing larger, just 
enough of the articles W are made to replace the 
discarded ones. No producer gets new machinery, 
but every one keeps his stock intact. 

The Simplified Representation Correct in Principle. — 
We have now a very simple representation of what 



80 ESSENTIALS OF ECONOMIC THEORY 

actually goes on under the name of the division of 
labor, and,^et the representation is in essential points 
accurate. In reality a very detailed and minute 
division and subdivision of industries takes place and 
the varieties .of goods produced are innumerable. 
Society, as a whole, is making the most highly com- 
posite product that can be conceived; namely, con- 
sumers' wealth in its countless forms. Each of the 
grand divisions of society — the general groups that 
we have represented by the series of A's or of B's — 
makes a complete article; but even that is in its 
own way far more composite than the symbol indi- 
cates, for it is apt to contain several kinds of raw 
material and to be made up of a large number of 
distinct utilities, each of which has its own set of 
producers. This complexity of the process of pro- 
duction does not change the principle of distribution, 
by which the product is virtually analyzed into its 
component elements and the value of each element is 
assigned to those who create it. This principle can 
be clearly represented by assuming that each subgroup 
has one distinct utility to create and that it takes 
only four of these to make an A'", a B"' or a C". 

A Synthesis within Each Subgroup. — There is 
within each subgroup a synthesis going on, and this 
also may be complex. Labor and capital dig ore 
from the ground — an unusually simple process ; and 
yet there are several distinct operations to be per- 
formed before the ore is ready for smelting. When it 
comes to fashioning the metal into useful shapes, the 
operations become very numerous and require many 
subordinate trades even for the making of one product. 
How many mechanical operations go to the making 
of a bicycle, an automobile, or a steam yacht? Too 



PRODUCTION A SYNTHESIS 81 

many to be represented in any table, but not enough 
to change at all the principle according to which those 
who help to make one of these composite products 
are paid according to their contributions to it. We 
may consider that all the work that is done in one kind 
of mill creates one utility. Though there are many 
subtrades in making a shoe and many more in making 
a watch, we may proceed as though there were only 
one transformation of the raw material required in 
each case. We may let the division between the 
contiguous subgroups be made commercially rather 
than merely mechanically, and regard the establish- 
ments that buy material and sell it in a more highly 
wrought condition as moving it forward by one stage 
on the road to completion, however many changes 
they may have made in it in the different departments 
of their several mills. The difference between shoes, 
on the one hand, and the leather and findings of which 
they are made, on the other, thus passes for one utility, 
A manufacturer of shoes puts his leather and findings 
through many operations before he has shoes for 
sale; but it is convenient to call all that the manu- 
facturer imparts to these raw elements before he makes 
them over in their new form to the merchant, one 
subproduct. 

Further Complexities which may he Disregarded. — • 
One man may be in several of the general groups. 
It is possible, for example, that he may furnish raw 
materials which enter into more than one finished 
article. Iron is so extensively used that it goes into 
more products than can easily be counted. The man 
who digs iron ore contributes to the making of bridges, 
rails, locomotives, buildings, machines, ships, and 
tools in indefinite number and variety. The price 



82 ESSENTIALS OF ECONOMIC THEORY 

of each of the articles into which any of this material 
goes contains in itself the price of that part of the raw 
material which goes into it. There is steel in a ship, 
and the maker of that part of the output of raw steel 
which goes into a ship gets his pay from the price of 
the vessel; and so with the crude metal which goes 
into a bridge, a building, an engine, etc. What the 
producer of a material gets from each source tends, 
under perfectly free competition, to equal in amount 
what he contributes toward the value of the corre- 
sponding article. In terms of our table a miner may 
furnish ore from which iron is taken for the making 
of both A!" and W ; and if so, when the distributive 
process analyzes these products into their elements, 
the value of what he has in each case contributed 
will fall to him. He will be paid according to the 
help he has afforded in the making of the A!" and the 
W , and this fact does not change in principle the 
manner in which the income of society is divided. 
If the man helped to make only one thing, he would get 
a part of the price of that one thing ; but if he helps 
to make several, he will get a part of the price of each 
of them. Each group has one grand function to 
perform, such as the making of an K'" , and if the 
man helps in more than one, and is paid accordingly, 
his total pay is according to the amount he produces 
in all the different functions he performs, and the 

I principle of distribution works as perfectly as it would 
if the man were confined to the single subgroup A. 

' For simplicity we assume that he is so. 

The Functions of Capitalist, Laborer, and Entre- 
preneur often performed hy One Person. — One person 
may perform several functions, not only by contribut- 
ing to the products of several groups, but by con- 



PRODUCTION A SYNTHESIS 83 

tributing in more than one way to the product of 
one subgroup. He may, for example, both labor 
and furnish capital, and he may, further, perform 
a special coordinating function which is not labor, 
in the technical sense, and scarcely involves any con- 
tinuous personal activity at all, but is essential for 
rendering labor and capital productive. What this 
function is we shall presently see. We shall term 
it the function of the entrepreneur, using this term in 
an unusually strict way. We shall keep this function 
quite distinct from the work of the superintendent or 
manager of a business. 

How Much the Term " Labor ^' Covers. — We in- 
clude under the term labor all effort expended in a 
routine way in carrying on business. The overseers 
in the shops, the bookkeepers, clerks, secretaries, 
treasurers, agents, and, in short, all who perform any 
of the labor of management for which they get or can 
get salaries are laborers in the comprehensive sense 
in which we use the word. It comes about that the 
employer usually labors; for he does the highest and 
most responsible work in his own mill or shop. It 
is not, however, in his capacity as entrepreneur, or 
" undertaker, '' that he labors; for, as the entrepreneur, 
properly speaking, he employs and pays for all the 
work that receives a stipend. He may employ 
himself, indeed, and set aside a stated sum to pay 
his own salary; but this means that in his capacity 
as entrepreneur he needs a good manager and hires 
himself to act in that capacity. Scrupulous fidelity 
is the most important quality that a manager can 
possess, and the employer can always trust himself 
to possess it so long as it is his own interests that he 
controls. 



84 ■ ESSENTIALS OP ECONOMIC THEORY 

Entrepreneur and Capitalist. — In the same way 
we include in the capital of an establishment whatever 
invested funds the employer himself supplies, as well 
as what he hires from others. Here again a man is 
likely to serve in more than one capacity, for as an 
entrepreneur he hires capital and as a capitalist he 
lets it out for hire, so that in the one capacity he hires 
capital from himself acting in the other capacity. 
The man ''puts money" into his own business and 
gets interest for the use of it. 

The Different Functions of the Same Man dis- 
tinguished in Business. — This distinction between 
the different functions that one person may perform 
is not a mere refinement of theory, but is something 
that is recognized in business and has great practical 
importance. In a corporation officials who are also 
stockholders receive salaries that are usually reckoned 
on the basis of the amount that they could get in the 
market if they were to enter the employment of other 
corporations and do the same kind of work they are 
now doing. Favoritism may give them considerably 
more than this amount, but even then this amount is 
the basis of the calculation which fixes their stipend. 
If they are paid more than their work is worth to 
their own corporations, what they get is something 
besides wages or any other normal and legitimate 
income. If they accept for their time less than they 
are worth, they make a donation to the corporation. 
Neither filching something for nothing out of the 
returns of the corporation, nor giving it a gratuity, 
is to be here assumed as existent, since we are not 
dealing with the phenomena of quasi-plunder or 
eccentric benevolence. The character of wages of 
management, as the reward for a high grade of labor, 



PRODUCTION A SYNTHESIS 85 

is recognized in business life, and the salary of the 
manager, whether he is a stockholder or not, is usually 
expressed in a definite sum of money and is gauged, i . 
crudely or accurately, according to his value as a 
servant of the company. 

Dividends often Composite. — In like manner it is 
important in the bookkeeping of a company to ascer- 
tain how much of the return to the stockholders is 
merely interest on the capital they have themselves 
invested and how much is true profit, or the net gain 
which is over and above interest. In business life 
a distinction is pretty clearly maintained between 
the three kinds of income that have been described; 
namely, the reward of labor in all its iorms, the 
reward of capital, going to whoever furnishes it, and 
the reward of a coordinating function, or the function 
of hiring both labor and capital and getting whatever 
their joint product is worth above the cost of the 
elements which enter into it. This essentially com- 
mercial margin of returns from production above all 
costs of production is profits in the strict sense and 
would be nonexistent in an absolutely static industry. 
It comes into existence in consequence of the changes 
with which social Economic Dynamics deals. 

Three Incomes entirely Distinct. — Wages, interest, 
and profits, then, are the three incomes that we shall 
distinguish. We shall keep profits completely sepa- 
rated from the wages of any kind of labor and from 
the interest on any kind of capital. This income 
falls to the entrepreneur, otherwise called the under- 
taker, or the employer and coordinator of labor and ^z 
capital, and it comes only when the product of the 
operations carried on in his establishment exceeds all 
wages and all interest that he has to pay. 



86 ESSENTIALS OF ECONOMIC THEOEY 

How a Man could he an Entrepreneur Only. — If a 
man should hire all the capital that he needs in a 
business and also all the labor, including the labor of 
every man in the office force, and reside thereafter 
in a distant country, holding no" consultations with his 
managers, whatever income he might get would be 
purely an entrepreneur's profit. It would not be 
interest — for that amount would have to be paid 
to the men who had loaned the capital — and it 
would not be wages — for they would have to be 
made over to the men actually doing the work. The 
absent entrepreneur would be, in the eye of the law, 
the purchaser of all the elements which go into the 
product, since all the purchases are made in his name. 
The managers are only his agents, and when they buy 
raw materials or supplies for the mill, they buy them 
for him and by his authority, and he is under the obli- 
gation to pay for them. Moreover paying wages is, 
in reality, buying the share which labor contributes 
to the product of the mill. The workmen have a 
natural right to the value which their work, of itself 
and aside from the aid furnished by others, imparts 
to the material that is put into their hands, and when 
they sell their labor, they are really selling their part 
of the product of the mill. In like manner paying 
interest is buying the share which capital contributes 
to the product. The owners of the capital have an 
original right to what the machines, the tools, the 
buildings, the land, and the raw materials, of them- 
, selves and apart from other contributions, put into the 
joint product. In reality they sell this share for a 
consideration in the form of interest. In a static 
state labor and capital together create the whole 
product of the mill ; wages and interest are the prices 



PRODUCTION A SYNTHESIS 87 

that they get for their several contributions, and the 
entrepreneur pays these purchase prices and by virtue 
of this becomes the owner of the whole product. 
Having the product, he sells it in the market for what 
he can get. If this were more than the cost to him of 
all the elements that have gone into it, he would have 
a net profit remaining. It would be a remainder 
accruing to the owner and seller of the product after 
the costs of getting a title to it have been defrayed. 
Whether the absent entrepreneur of our illustration 
gets anything from his business or not depends on 
the question whether such a remainder of returns 
above costs is afforded. 

Profits Nil in a Static Society. — We shall see that 
if labor and capital can move about in the system 
of groups so freely that each agent is as productive 
in one place as it is in another, there wiU be no prod- 
uct anywhere in excess of wages and interest. Labor 
and capital then create and claim for themselves the 
whole output of their industries. When the entre- 
preneur has given them their shares, by paying wages 
and interest, and has paid for raw materials, he has 
nothing left. In actual business competition is often 
sharp enough to prevent men from getting more than 
interest on their capital and a fair return for the 
labor they spend in directing their business ; and pure 
theory here assumes that competition is always and 
everywhere sharp enough to do this. It is ideally 
efficient. Labor and capital are ideally mobile and 
ready to flow at once to the points where any net 
profits can be made. Such a condition implies that 
society is in a static state, and we shall see what this 
condition is. It implies an absence of organic change 
in society. The great collective producer does not 



88 ESSENTIALS OF ECONOMIC THEORY 

alter either its form or its mode of producing wealth. 
Industry goes on, indeed, but it goes on in a change- 
less way. Reserving the full description of this state 
for a later chapter, we note here that the adjustment 
which would theoretically bring a society to such a 
state would preclude all gains for its entrepreneurs} 
The Merging of Functions Desirable. — The uniting 
in one person of the functions of capitalist, laborer, 
and entrepreneur contributed much to the productiv- 
ity of the small-shop system of former days. The 
man who had a few thousand dollars invested in a 
little shop and employed a few men to assist him got 
three different kinds of income, and the sum of the 
three was larger than anything he could have secured 
if he had been only a laborer or only a small capital- 
ist and entrepreneur. He worked harder and more 
intelligently than a hired superintendent would have 
done ; he was led to be cautious because his own capi- 
tal was risked in his business, and yet he was spurred 
to enterprise by the fact that when, by virtue of the 
influences which we call dynamic, profits were made, 
he got them. Even in the largest corporations the 
same conditions contribute to success, and it is best 
that managers should be owners of some part of the 
capital which they handle and receivers of some por- 

^ The preceding paragraphs may seem to show that if an 
entrepreneur ever gets an income, he does it by wresting from 
labor and capital a part of their products. We shall see that 
in dynamic industry there is a normal way in which he may 
get an income without taking anything from the incomes 
that labor and capital would get if he did not perform his 
part. His return may come from the result of an enabling 
act which he performs, whereby both the labor and the capital 
of a particular subgroup become more productive than other 
labor and capital are and more so than they would be if the 
entrepreneur's enabling act were not performed. 



PRODUCTION A SYNTHESIS 89 

tion of the profits which they try to secure for their 
companies. Where competition is sharp, companies 
directed by their owners may supplant those of which 
the direction is given over to hired managers. The 
growth of corporations does, however, tend to put 
salaried men more and more into controlling positions 
and to reduce the power of the body of stockholders, 
who perform a joint function as capitalists and entre- 
preneurs. In itself this tends to reduce profits and 
detracts from the advantages which the incorporation 
of a business offers. 

Distribution primarily Functional rather than Per- 
sonal. — Where men get incomes that are composed 
of wages, interest, and profits, economic science should, 
in the first instance, tell us how the rates of wages 
and interest and the amount of profits are determined. 
A study of the static laws of distribution concerns 
itself with the reward of labor as such, and the reward 
of capital as such, while a study of dynamics takes 
account of pure profits. When we know what the 
rates of wages and interest are, we can tell what any 
capitalist-manager should have by knowing how much 
capital he furnishes and how much and how well he 
works as a manager. If the business is yielding a 
net profit, over and above the interest on its capital, 
we can tell what part of this net income any one 
stockholder will get — • in the form of a rate of divi- 
dends in excess of the rate of interest — if we know 
how much of the common stock of the company he 
owns. His personal income depends on the incomes 
attaching to the functions he performs. The science 
of distribution should tell us primarily, not what any 
man personally gets as a total income and how well 
off he is as compared with other men, but in what way 



90 ESSENTIALS OF ECONOMIC THEORY 

the wages of his labor, the interest on his capital, and 
the return for the entrepreneur's function are fixed. 
In technical terms this is saying that distribution is 
primarily functional and not personal. Certain forces 
assign certain rewards to different functions which are 
involved in the creating of wealth, and the science of 
distribution tells us how these forces work — tells 
us, in short, how wages, interest, and true profits are, 
in and of themselves, determined. If any man works 
and gets wages, that part of his income will be deter- 
mined by the wages law. If he furnishes capital, a 
second part of his income will be determined by the 
interest law. If he also coordinates labor and capital, 
whatever he may thus gain is determined by the law 
of profit. Economic science has to ascertain and 
state what these three laws are, though in its static 
division it has only to account for two of them. 

Costs as well as Gains Apportioned. — The term 
distribution, as commonly used, denotes a division of 
the gains of industry; but as we have said, there are 
sacrifices which have to be borne in getting the gains, 
and these also have to be shared. Wealth benefits 
men in the using, but puts burdens upon them in the 
making; and when all society does the making, it 
has to apportion, in some way, not only the benefits 
but the burdens. We shall take account of these 
■ sacrifices because of the relation that they bear to the 
gains. They act as an ultimate check on production. 
Men would go on producing indefinitely if the opera- 
tion cost them nothing, since it would always be agree- 
able to have a further income; but they necessarily 
encounter pains and sacrifices that, sooner, or later, 
bring the enlargement of their incomes to an end. 
Much that is of importance occurs at that critical 



PRODUCTION A SYNTHESIS 91 

point where the sacrifices of production put an end 
to the extension of it. It is the positive fruits of 
production that we have first to consider ; and what in 
this connection we wish first to know is how wages and 
interest are determined when industry is carried on 
in a social way and under a system of competition. 
We shall find that these incomes are always tending 
toward standards which they would reach if society 
were in the state which we have described as static. 
How they are forced away from their standards by 
the changes and disturbances of actual life, and how 
the standards themselves change with social develop- 
ment, will be the subject of the latter part of this 
treatise. 



CHAPTER VI 

VALUE AND ITS RELATION TO DIFFEEENT INCOMES 

Functional distribution controls personal in- 
comes since each man who gets, in a normal way, any 
income at all performs one or more productive func- 
tions, and his total income is the sum of the returns 
for these several functions. Moreover under such a 
condition of ideally perfect competition as we have 
assumed each of these functions is rewarded accord- 
ing to the product that it creates ; and each man 
accordingly is paid an amount that equals the total 
product which he personally creates. Men's products, 
even in the disturbed conditions of actual life, set the 
standards to which their returns tend to conform, 
though they vary from them in ways that we shall 
not fail to notice. 

Group Distribution. — The grand total of the social 
income has to go through a preliminary division be- 
fore it is shared by laborers, capitalists, and entre- 
preneurs. In each industry the pay of all these 
functionaries comes from the selling price of the com- 
mercial article that they cooperate in making. The 
price of shoes pays all shoemakers, whether what they 
contribute to the manufacturing is labor, capital, or 
mere coordination ; and it also pays ranchmen and tan- 
ners for what they contribute in the shape of leather 
raw and dressed. If the price of shoes should rise, 
there would be a larger income for the group whose 
activities create them. So if woolen clothing were 

92 



VALUE AND ITS RELATION TO INCOMES 93 

to become dearer, there would be more money for the 
group that rnakes it, and this would include those who 
raise sheep and those who convert wool into cloth^ 
as well as the garment makers themselves. The 
question, what members of a group would get the bene- 
fit of a rise in the price of its product, is one that must 
be discussed in connection with economic dynamics, 
and we shall find, when we reach this part of the 
subject, that it is entrepreneurs^ gains which come 
largely from sources like this. We have already seen 
that, in a static condition and with prices, wages, and 
interest immovably held at rates to which perfectly 
free competition would bring them, entrepreneurs as 
such would get nil, and the whole price of every article 
would be distributed among the laborers and the 
capitalists who make it. The proof of this will 
appear when we have examined the process by which 
the values of goods are adjusted, and this will help 
to prepare the way for a study of the sources of net 
profits, which are an all-important feature of actual 
business. Society is honest or dishonest according 
as this entrepreneurs' income is gained in one way 
or in another ; and it is not too much to say that be- 
fore the court of last resort, the body of the people, 
no system of business will be allowed permanently 
to stand unless the basic principle of it tends to elimi- 
nate dishonest profits. A chi ef purpo_s e__QL-statie 
studies is toaffordja-Jii£ans.of_t£s ting the legitim acyi 
of__yiejncomgsJJmt~aQiQfi_to ^en^repre neMrs . 

Market Price. — The old phrase supply and de- 
mand describes the process by which the market 
price of anjrthing is determined. The total mercan- 
tile stock of goods of a particular kind at any one time 
on hand is, of course, an exact quantity, and the law 



94 ESSENTIALS OF ECONOMIC THEORY 

of "market value," when these words are used in a 
restricted and technical sense, determines the price 
at which this predetermined amount can be sold. 

How a Normal Supply is Determined. — This 
present stock, however, was brought into existence 
by producers who looked forward to the time when 
they could probably sell it at a certain price ; and the 
higher this anticipated return for the article, the more 
of it they were induced to make. The price, which 
to-day depends on the quantity on hand, acted in 
advance as a lure to bring that quantity into existence, 
and among the different articles which men can pro- 
duce, they are forever singling out for increased pro- 
duction those things which offer the strongest lures — 
that is, the things that sell for the largest amounts as 
compared with the cost of making them. The ultimate 
tendency of all this is a certain adj ustment of the relative 
supplies of different commodities. It is that adj ustment 
which brings all prices to a level determined by cost. 

Natural Value. — This tendency toward cost prices 
— those which afford to the producers wages for 
•all their labor but no true entrepreneurs^ profit — 
establishes a further law, that of " natural value," 
and this it is that fixes the standard to which, in the 
long run, market values, as adjusted by supply and 
demand, tend to conform. A market value is natural 
or unnatural according as it does or does not conform 
to a certain standard, and this ultimate standard 
itself is the cost of producing the several kinds of goods. 
What the term cost in this connection really means 
we must later see; but for the present we may 
take the common and practical view that it is the 
amount of money that an entrepreneur must pay 
out in order to bring the article into existence. If 



VALUE AND ITS RELATION TO INCOMES 95 

there were very little wheat in the granaries of the 
world, demand acting on this limited supply would 
determine the selling price of it, and this price would 
be high as compared with the cost of raising this grain. 
It would also be higher than the selling prices of other 
things which are produced by the same expenditure 
of labor and capital that has to be made in raising 
the wheat. The market price would, for the time 
being, be unnatural and would in due time be brought 
down ; but this would have to be done by the raising 
of more wheat. In other words, though the selling 
price of a small supply of wheat may be normal for 
that amount, the amount supplied is itself abnormally 
small, and in view of that fact the resulting price is 
too high to be allowed to continue. As a permanent 
price it would not be natural. The quantity supplied 
tends to increase till the market price conforms to 
the cost of raising the wheat. We have to see, first, 
how demand fixes the price of a definite amount of 
anything which is offered for sale and, later, how the 
quantity offered is controlled. 

How Prices are Determined. — It is certain that if, 
in a given market, we increase the quantity of goods 
that are to be sold, we lower the price,^ while, if we 

* The term market, as used in this discussion, means a local 
area within which goods of given kinds are bought and sold; 
and for different purposes we may make the area small or 
large. For some purposes it is necessary to take a "world 
market " into consideration, while for others it is desirable , 
to include only that part of the world within which com- 
petition is very active and within which also goods and per- 
sons move freely and cheaply from place to place. A single 
country like the United States affords a market large enough 
to illustrate the laws of valve, though one must always keep 
in view the relation of this circumscribed area to its environ- 
ment. How local areas maj'', in a scientific way, be delimited 
and isolated for purposes of study will appear in a later chapter. 



96 ESSENTIALS OP ECONOMIC THEORY 

diminish the quantity, we raise the price. That is 
the commercial fact and it furnishes a beginning for 
a theory of value. 

I^et us suppose that we have a fixed quantity of 
goods on hand, that all must be sold, and that no one 
knows at the outset what price they will bring. 
There might conceivably go on an inverted kind of 
auctioning process, in which the sellers at the outset 
would ask a high rate, sell a few of their goods, and 
then gradually reduce the price till the last article 
should be sold. At each reduction of the price the 
"effectual demand," so-called, would increase. This 
means that the people who want the article are actu- 
ally willing to take and pay for larger quantities 
the lower the price falls. Mere desire does not influ- 
ence the market, but an "effectual demand" means a 
desire and a tender of the money that is asked for 
the goods. It is, in short, an actual purchase and 
the amount of it becomes larger as the price goes 
down. People who did not buy the article before 
now add it to the list of goods that they take for use, 
and the people who were already taking a certain 
quantity of it now take more. 

Equation of Supply and Effective Demand. — If this 
effective demand, or amount of goods actually bought 
and paid for, becomes steadily larger the lower the 
price becomes, it is clear that, however large the total 
supply may be, it can all be sold by making the price 
low enough. It was once thought that this is all 
we need to know of prices current or market values. 
At some selling rate or other the quantity actually 
offered will come to equal the quantity that is actu- 
ally bought. This is the equation of demand and 
supply. The quantity offered is here supposed to be 



VALUE AND ITS RELATION TO INCOMES 97 

fixed and to include all of the article that is in dealers' 
hands and that has to be sold ; and the price, starting 
at a high rate, is supposed to go down till the sale of 
the entire quantity is effected. 

Varying Demand and Price. — The facts that have 
just been stated account only in a partial way for 
the adjustment of market price. One who wishes 
to trace phenomena to their causes cannot help asking 
why demand and supply insure the selling of a given 
amount of goods at one rate rather than at another. 
If apples are offering at two dollars a barrel, why is 
it that, in a particular local market, one thousand 
barrels and no more can, at that rate, be sold ? We 
can readily see that at one dollar a barrel more could 
be sold than at two, and that at three less would 
be sold. But why is it that, at two dollars, the 
definite number of one thousand barrels is the 
amount that is taken and paid for? Why is the 
equation of demand and supply established at exactly 
that price ? 

Demand and Final Utility. — We come nearer to the 
cause that acts in adjusting the price of apples when 
we say that they sell at two dollars a barrel because 
that sum expresses their "final utility." This means 
that, if such an auctioning process as we have described 
were resorted to, the last barrel of apples which would 
be sold would have to the buyer an amount of utility 
just equal to that of the final unit of any other article 
that could have been had for the same money. The 
auctioning, however, would cause different barrels 
of apples to sell at different prices, whereas there is 
something in the working of competition which causes 
all of them to sell at the same price. It is necessary 
to see, first, how the price of the ''final" one is ad- 



98 ESSENTIALS OF ECONOMIC THEORY 

justed and, secondly, how that fixes the price of all 
the others. 

The Law of Diminishing Utility. — We revert here 
to one of those general laws of economics that we 
have already stated and see it acting under the condi- 
tions of distinctly social life. Goods of a given kind 
have less and less utility, per unit, the more the user 
has of them. If you offer him apples in increased 
quantity, he will value the first part of the supply 
highly, but will attach less value to the later parts. 
When the desire for this fruit is fairly well satisfied, 
he will find other articles of more importance. At 
the price of two dollars a barrel it is just worth his 
while to buy a final barrel of them. That quantity, 
as added to his winter's supply, will give him two 
dollars' worth of benefit. This means that it will do 
him as much good as anything else which he can get 
for the same amount of money. 

The Equalization of Final Utilities. — Two dollars 
spent in adding to his previous stock of other things 
will do the man in the illustration the same amount 
of good that he can get from a final barrel of apples, 
and no more. In the case of goods which are all 
alike and of which consumers are always glad to use 
an additional amount, prices tend to adjust themselves 
in such a way that a final unit of any one which the 
consumer buys with a dollar is worth just as much 
to him as a final unit of any other article he buys 
with that amount. The last dollar paid for apples 
is as remunerative, in the way of pleasure and benefit 
secured, as is the last dollar used to improve his ward- 
robe, to add something to his stock of furniture, to 
buy tickets to the theater, etc. Apples have, as it 
were, to compete with clothing, furniture, and amuse- 



VALUE AND ITS RELATION TO INCOMES 99 

ments for the consumer's favor, and if the vender 
charges more for them than do the venders of other 
things having the same power to give pleasure, some 
of the apples will remain unsold ; for though custom- 
ers will always give as much as they would have to pay 
for other things of equal final utility, they will not 
give more. 

The Prices of All Increments of Supply Equal. — 
A consumer always gets a net surplus of benefit 
from the early increments of the goods he consumes. 
If the last barrel of apples is worth two dollars, — ■ 
or, what is the same thing, if the last barrel has in it 
an amount of utility equal to the final utility of other 
things that two dollars will buy, — the first barrel 
has a larger utility ; and yet it costs no more than the 
last one. The sellers of apples, if they expect to dis- 
pose of all that they have, must at the outset fix the 
price at such a point that the very last increment of 
the supply will successfully compete with other ar- 
ticles for the favor of purchasers. Competition forces 
them to sell the whole amount so cheaply that the 
least important part of it may be as important to the 
purchaser of that part as the corresponding and least 
important part of the supply of other things. Noth- 
ing but a monopoly of the entire available stock 
would enable them to carry out the auctioning plan 
and offer the stock piecemeal, so as to get a higher 
price for the parts offered early. Even then buyers 
who should perceive the fact that a large part of the 
stock remained in reserve and that it must ultimately 
be sold would be able, by delaying their purchases, 
to get the benefit of a later and lower rate, so that 
the monopoly itself would be only partially success- 
ful in its policy. In the absence of a monopoly 



100 ESSENTIALS OF ECONOMIC THEORY 

venders are compelled to sell all articles of one 
kind and quality at one price. The man who should 
fix a higher price on his portion of the supply would 
be passed by in favor of other sellers who were 
disposing of their final increments, and his business 
would quietly drift away from him. There cannot he 
two prices for one commodity in the same market at 
the same time. This fact is fundamental. Even the 
monopoly is able to get different prices for differ- 
ent parts of its output only by offering them at differ- 
ent times; and competing producers cannot do this. 
They are forced to keep the price of all they offer at a 
level that expresses its final utility. 

The Law of Value affected by the Difficulty of using 
Two Similar Goods at Once. — There are two imper- 
fections in the common statement of this law of final 
utility which need to be removed in order that the 
theory' of value, which is based on the law, may be 
true and useful. The first lies in the assumption that 
people buy completed articles, such as coats, tables, 
vehicles, watches, etc., in regular series of units, add- 
ing to their stock coat after coat, watch after watch, 
etc., all just alike, till the utility of the last one becomes 
so small that it is better to buy other things. On this 
supposition the price of the whole supply of any such 
thing corresponds with the utility of the last one in the 
consumer's series. This fairly well describes the case 
of commodities like apples, of which men consume 
now more and now less per day or per week and are 
always glad to increase the amount they use. Of most 
kinds of consumers' goods a person wants at one time 
one unit and no more, and a second unit, if he has to 
use it himself within the same time in which he uses 
the first, would be an incumbrance. Its utility would 



VALUE AND ITS RELATION TO INCOMES 101 

be a negative quantity. Two quite similar coats 
would never be bought by the same person if he had 
only his own needs in view and must use both coats 
through the same period. The first unit of his supply 
is, for this period, also the last. 

The Law of Value affected by the Fact that the Final 
Unit of a Good is usually a Complex of Unlike Utilities. 
— The second imperfection consists in the assump- 
tion that in measuring the utility of such a unit the 
consumer estimates the importance to himself of the 
article taken in its entirety. In the case of the apples 
of our illustration the difficulty is not obvious. A 
man, as we have just noticed, may increase or dimin- 
ish his consumption of this fruit ; the first few apples 
that he uses will give him more pleasure than a second 
similar quantity, and the price of apples in the market 
may actually depend on the utility of the final peck 
of apples that each of the customers consumes in a 
season. In other words, there is, in this instance, a 
probability that the goods, although supplied at 
once, may be appraised as if they were offered in a 
regular series and that the law of final utility, in its 
common and simple form of statement, may in this 
particular apply to the case. The second difficulty, 
however, remains, and even in the case of such goods 
as apples renders the common statement somewhat 
inaccurate, while in the case of most kinds of consum- 
ers' goods the inaccuracy is glaring. If the price of 
fine watches corresponded with the utility of the last 
one that a consumer uses, it would be many times 
greater than it is. Rather than go without watches 
altogether many a man would pay one thousand 
dollars for one for which he actually gives a hundred ; 
and, moreover, this watch may be the "final" one 



102 ESSENTIALS OF ECONOMIC THEORY 

in his case. The utihty of the last overcoat that a 
man uses in the winter may be such that, if he could 
have it on no other condition, he would readily give 
five hundred dollars for it instead of fifty. 

How Unlike Services may he rendered hy One Good 
at the Same Time. — What people want of any useful 
thing is an effect in themselves, — a pleasure or a 
benefit which they expect to get, — and apart from 
this subjective result they would not want the thing 
at all. The power to confer a particular benefit is a 
utility. Men buy goods solely for their utilities, 
and they measure these service-rendering powers in 
the things offered to them and pay for them accord- 
ingly. Now, it happens that articles often combine 
in themselves a considerable number of different 
utilities, or service-rendering powers, and that in 
buying an article the man pays for them all. It is 
as though four or five different servants, each having 
his own specialty, were to offer themselves for hire 
and invite an employer to consider what each one 
could do for him. In buying an article which will 
serve him in several ways, a man appraises all the 
unlike services that the article will render. He se- 
cures several services at once, as he would do if he 
hired, in a body, several actual servants. The same 
thing would happen if, instead of hiring human ser- 
vants with different aptitudes, one should buy different 
commodities each of which is, in reality, an inanimate 
servant, able, in its own way, to do something useful or 
agreeable for the purchaser. We could bunch a lot 
of these goods and buy them collectively. Venders 
of the goods could tie them together in bundles and 
offer them thus for sale. If the different goods were 
also sold separately in the market, they would com- 



VALUE AND ITS RELATION TO INCOMES 103 

mand in the bundles the same prices that they would 
command when sold each by itself, and a bundle would 
bring the sum of the several prices of its component 
articles. In just this way in which an aggregate of 
different good's would get its valuation does any one 
article which is made up of different utilities get its 
rating. The utilities are appraised separately. In 
buying an article which is a composite of different 
utilities, we virtually employ a company of servants 
who have different specialties and insist on being 
hired all together or not at all. 

How the Normal Price of a Bundle of Unlike Goods 
would he Fixed. — We have now to see how the action 
of the market analyzes an article and puts a price on 
the several utilities which compose it. The market 
does this in exactly the same way in which it would 
appraise a bundle of dissimilar articles which had to 
be sold separately, and we will therefore trace the 
operation by which a package containing the com- 
modities A, B, C, and D would get its value in an 
actual market. 

How the Normal Price of a Single Good in a Bundle 
of Unlike Goods would he Fixed. — Let us see how a 
bundle made up of commodities A, B, C, and D would 
get its value in the market. We will suppose that 
these articles are here named in the order of their 
importance, and that A has the highest utility, since 
it renders the most important service, and that D has 
the least. It may be that the article A has a utility 
rated at one hundred dollars in a particular man's 
esteem. He would give one hundred dollars for it 
rather than do without it altogether. The service, 
then, that one article of this kind can render is ex- 
pressed by the sum one hundred dollars. Article B 



104 ESSENTIALS OF ECONOMIC THEORY 

taken separately may be worth fifty dollars, since it 
may render such services that the man would give 
fifty dollars rather than be without it. A third article, 
C, may in the same way be valued at twenty dollars 
and a fourth at ten. Now, if a man has to buy the 
whole bundle, must he pay one hundred dollars plus 
fifty plus twenty plus ten, or one hundred and eighty 
for the whole? This does not by any means follow. 
The first article may be sold separately at a price 
far below one hundred dollars. There may be so 
large a supply of it that, in order to find a market 
for it all, the makers must take ten dollars for it. 
This fixes the market price of that amount of this 
commodity at ten dollars. If we now glance beyond 
the question of the ''market price" of the goods and 
consider their more permanent or ''normal price," 
the inquiry requires us to do more than ascertain 
why a definite quantity of the goods offered at a 
certain time sells for a certain amount. An appeal 
to the law of final utility answers that question. 
To know, however, why the permanent price is what 
it is, we have to know what fixes the permanent 
supply, and we discover that the cost of making the 
goods is here a dominant influence. For the present 
we assume that this cost does not change, since such 
changes are a subject for the dynamic studies which 
will come later. The present fact is that production 
has been carried to such a point that no more of these 
goods can be sold at the cost price, and there the 
enlargement of the output has stopped; the supply 
has at some time in the past reached this normal 
point and now remains there. Ten dollars represents 
the final utility of the article, and this sum is what it 
costs to make it. If it could be sold for any more than 



VALUE AND ITS KELATION TO INCOMES 105 

that, competition would bring new producers into 
this business and would impel those already in it to 
enlarge their production till the price would stand 
at the normal or cost level of ten dollars. 

The Consumers^ Surplus. — In every such case 
there are men who would give much more for the 
article rather than be without it, and we have sup- 
posed that some one would pay a hundred dollars for 
this commodity if he could not otherwise obtain it. 
Ninety dollars, then, measures what we may call his 
consumers' surplus, or the clear benefit he gets from 
buying at its market price an article that is worth 
to him so much more. This comes about by the fact 
that the makers of article A, in order to sell the amount 
of goods that competition has impelled them to make, 
must accept the offers of persons who can consistently 
give only ten dollars for it. These are relatively poor 
persons, and as the sum of ten dollars expended on 
other articles would benefit them as much as ten 
dollars spent on this one, it is a "final" purchase, or 
a final increment of their consumers' wealth. In 
order to get it they sacrifice, in some other form, a 
benefit as great as the one they get from acquiring 
this commodity and receive, therefore, no consumers' 
surplus from it. These are the men whose demand 
helps to fix the price of the article A, and the willing- 
ness of other persons to give more does not make it 
bring any more. The rich men, who stand ready to 
pay a hundred dollars, if necessary, are gainers by 
letting poorer men fix this price. It is by catching 
the patronage of these poorer men that the makers 
can dispose of their large output, and in doing this 
they have to bring the price down to ten dollars. 

The Function of a Special Class of Marginal Pur- 



106 ESSENTIALS OF ECONOMIC THEORY 

chasers of Each Article. — In like manner there is a 
class of "marginal purchasers" of the article B, or 
the persons who pay for it so much that they get no net 
benefit or consumers' surplus from the purchase. If 
they did not buy this article, they could get something 
else that would do them as much good for the same 
outlay. It costs, let us say, only ten dollars in the 
making, and enough of these articles are made and 
offered for sale at that price to supply all customers 
who are attracted by the offer. The men who would 
pay more for it do not count. Each of the other 
articles in the bundle, when it is offered separately 
and at the cost price which competition establishes, 
represents a final utility to some one class of pur- 
chasers. Competition has made the whole supply 
so large that, in order to dispose of it, venders must 
attract the particular class who will take it at the 
ten-dollar rate. This class is in the strategic position 
of market-price makers for this one thing. They are 
the last class to whom the producers can afford to 
cater. If each of the five articles in the bundle costs 
the makers ten dollars, and if so many of each are 
made that they just supply the needs of the classes 
that will buy them at ten dollars apiece, the price of 
all five, when sold separately, will be fifty dollars. 
Most of the purchasers of each article would give 
more than ten for it if they had to, but some would 
not do so, and the producers cater to the needs of 
these marginal persons. 

How the Prices of the Goods are fixed when they 
are sold in Various Combinations. — How do these 
articles get their valuation when they are tied in 
bundles containing all five of them and the bundles 
are sold unbroken? In essentially the same way as 



VALUE AND ITS RELATION TO INCOMES 107 

when sold separately. Article A, we will suppose, 
is one of the necessaries of life and is to be had by 
itself in the market. Article B represents a comfort, 
and C and D are luxuries. The bundles are so made 
that A and B are often sold together; as are also 
A, B, and C; and A, B, C, and D. A purchaser may 
have at his option the first only, the first and the 
second combined, the first three, or all four. Article 

A, when it stands alone, can be had at the natural or 
cost price and in quantity sufficient to supply the 
wants of all classes of buyers from the highest down 
to the class which will take it at ten dollars — the 
cost of making it — but at no higher price. Any one 
can have the A either alone or tied to other articles 
at this price. One who buys A and B in combination 
will pay for article A only the same price that it 
commands when sold separately; and since he buys 

B, the utility of which is less than that of A, at ten 
dollars, it is clear that he gets A for less than it is 
worth to him, but the ten dollars may be all he would 
give for the B. This man is not the marginal pur- 
chaser of A, for in buying it he realizes a consumers' 
surplus; but for the article B, which is tied to it, he 
may pay all that it is worth to him. For that he is 
a marginal purchaser, and as such he gets no con- 
sumers' surplus out of it. What he pays for B will 
just suffice to buy something else which is equally 
important to him. The price of this bundle of two 
articles is ultimately determined by the cost of the 
two components, which is twenty dollars, and enough 
of each component is made and offered in the market 
to supply the wants of a class of persons who will 
barely decide to take it at the cost rate. The class 
that hesitates at taking A will not consider B, but 



108 ESSENTIALS OF ECONOMIC THEORY 

the class that hesitates at taking B gets a clear bene- 
fit from buying A at the price that expresses the 
utility of A to a poorer class of persons. 

How Different Classes of Purchasers cooperate in 
this Price Making. — The rule of one price for one 
article of course holds, and the man who would have 
a clear and decisive motive for buying the A for 
more than ten dollars, if he had to do so, gets the 
benefit of two facts: first, that it costs only that 
amount in the producing, and secondly, that com- 
petition makes the supply of it so large that it is 
brought within the reach of those persons who 
value it at only ten dollars. It takes two different 
classes of purchasers to fix the price of this package 
of two articles, and their ratings fix it at twenty 
dollars. Exactly the same influences regulate the 
price of the bundle which includes A, B, and C. 
Men who buy C can afford to have a luxury, and 
therefore, if they had had to do so, would have given 
more than they do give for the articles of necessity 
and comfort. If the price of A and B were higher 
than it is, they would still buy these two things, 
but they would not raise their bids for C, since for 
this they are marginal purchasers. This commodity 
is therefore sold at the price that will just induce 
this class of persons to add it to their list of con- 
sumers' goods. There is a further class in whose 
list of purchases D is marginal, while A, B, and C 
yield a consumers' surplus in the form of an un- 
compensated personal benefit. 

Different Utilities in an Article appraised as are 
Different Goods in a Package. — It is an actual fact 
that most commodities are like these packages of 
unUke articles. They are bundles of unlike utilities. 



VALUE AND ITS RELATION TO INCOMES 109 

and the market actually finds a way to analyze 
composite things and put a separate price on each 
utility. It may seem very theoretical to say that 
a concrete thing, like a watch, a coat, a dining table, 
or a roast fowl, is made up of such abstract things 
as utilities and that each of these has its separate 
price; yet such is actually the fact, and if goods 
were not valued in the market in this way, the 
prices of all articles of comfort and luxury would 
be very much higher than they are. 

A man pays seventy-five dollars for an overcoat, 
but if he could not get the service that the coat as 
a whole renders without paying five hundred dollars 
for it, he would pay it ; for otherwise he could hardly 
get through a winter. No man who buys an over- 
coat worth seventy-five dollars would refuse to pay 
more if that were the necessary condition of having 
an overcoat at all. The garment as a whole is far 
from being a "marginal utility" to any one; and 
yet there is something in it that is so. This element 
is likQ the article D in the fourth bundle referred 
to in our illustration. There is a particular utility 
in the composite good for which the man pays all 
that it is worth to him; and he would go without 
that utility if the seller charged more than he does. 
The most important service that the coat renders 
is that of keeping the man warm ; but a very cheap 
garment would render that service, and six dollars 
will buy such a garment. The man does not need 
to pay more than six dollars for that one service. 
The supply of cheap coats is such that the final 
one must be offered for six dollars in order to induce 
certain poor purchasers to buy it, and that, more- 
over, is all that it costs to make it. No one, there- 



110 ESSENTIALS OF ECONOMIC THEORY 

fore, is obliged to pay more than six dollars for 
something that will keep him warm, however much 
such a service may be worth to him. Coats of 
another grade have a second utility combined with 
this one, since they are made of better cloth and 
are more comely in appearance. Utilities of an 
aesthetic kind are combined with the crude qualities 
represented by the cheapest coats. The supply 
of coats of this grade is such that they must be of- 
fered for twenty dollars in order to induce some 
one to take the final or marginal one. What does 
this mean? It means that this purchaser will pay 
fourteen dollars and no more in order to have the 
second utility, consisting in comeliness, added to 
the first utility, capacity to keep him warm. This 
man would give more than twenty dollars rather 
than go uncloaked; for it is plain that, if he will 
pay fourteen dollars for comeliness, he will give 
more than six for warmth. Probably he would 
pay one hundred dollars for the article if he had to, 
and in getting it for twenty he gets a large con- 
sumers' surplus. This is because he secures the 
first utility (1) for less than it is worth to him, (2) 
for just what it costs in the making, and (3) for just 
what it is worth to the poorer purchasers. He is 
willing to pay only fourteen dollars for the comeli- 
ness, which is the second utility that the garment 
contains, and he is therefore a marginal purchaser 
of this second utility. It costs only the sum of 
fourteen dollars to add the second utility to the 
first, and enough coats of the second grade are made 
to catch the patronage of the class of buyers who 
will give so much and no more for it. They are 
the persons whose demand figures in adjusting the 



VALUE AND ITS RELATION TO INCOMES 111 

market price of this second utility. Competing 
producers of coats cause the supply of those of the 
second grade to be so large that they could not all 
be sold unless the second utility were offered for 
fourteen dollars. This makes the price of the entire 
coat twenty dollars as the result of catering in a 
detailed way to the demand of two different classes 
of buyers. 

In exactly the same way the price of the third 
grade is fixed at forty dollars and that of the still 
higher grade at seventy-five. In the third grade 
there is a utility which it costs twenty dollars to 
add to those possessed by garments of the second 
grade, and this is added to enough of them to supply 
aU persons who will pay twenty dollars or more 
for it. These coats are made of more highly finished 
goods and have better linings, and this gives them 
the third utility which the market appraises at its 
cost, which is twenty dollars. The men who buy 
the forty dollar coats get a surplus of benefit in 
securiiig the first two of the utilities that are em- 
bodied in them, since for these they pay less than 
they would pay if they had to; but they get no 
surplus over the cost of the third utility. It is to 
secure their custom that the vender must sell it 
for twenty dollars. In a like manner a coat of the 
next grade, which is a more fashionable garment, 
sells for seventy-five dollars because it has a fourth 
utility which costs another sum of thirty-five dollars 
and, to the marginal buyers, is worth that amount. 
These men get a surplus from buying the first three 
utilities at what they cost their producers and what 
they are worth to poorer purchasers. It appears, 
then, that a seventy-five dollar coat is a bundle 



112 ESSENTIALS OF ECONOMIC THEORY 

of distinct elements, or utilities, each of which has 
its separate cost and is sold at that cost price to 
a particular marginal class of purchasers. Each 
element is valued exactly as if it were in itself a com- 
plete article tied in this case to others, but also 
offered separately in the market. Persons of one 
class are final purchasers of the first utility when 
it is offered at its cost, six dollars. Another class, 
in a like manner, helps to set the price of the second 
utility at fourteen, and still other classes figure in 
the adjustment of the prices of the third and fourth 
utilities. These cost the manufacturers twenty dol- 
lars and thirty-five dollars respectively, and com- 
petition insures the making of enough of them to 
catch the patronage of those who will pay just these 
amounts. Members of one class act as marginal 
purchasers in price making in the case of one utility 
only. The concurrent action of all of them results 
in setting the price of the best coat at eighty dollars. 
It is a very practical fact that the rates at which 
all fine articles sell in the market are fixed in this 
way. Such articles contain utilities unlike each 
other. They have power to render services of 
varying degrees of importance, and each of the 
several services gets its normal valuation when 
producers make enough to supply the want of a 
particular group of persons to whom it is a mar- 
ginal service and who are willing to pay only what 
it costs. They would go without that one service 
if they had to pay more for it. 

This Method of Valuation Applicable to All Com- 
modities of High Grade. — Illustrations of this prin- 
ciple might be multiplied indefinitely. A fine watch 
tells the time of day, but something that would do 



VALUE AND ITS EELATION TO INCOMES 113 

that could be had for a dollar, and that is all that 
this fundamental element in the fine watch sells 
for. It takes a series of purchasers bidding on the 
higher utilities of the fine watch to make it sell for 
five hundred dollars. The man who buys such a 
watch would give, perhaps, ten thousand for it 
rather than be without a watch altogether, but he 
is saved from the necessity of doing so by the fact 
that poorer customers have done the appraising in 
the case of all the more fundamental qualities which 
the watch possesses. So long as an Ingersoll ''dollar 
watch" will tell the time of day, no one will pay 
more than a dollar for exactly that same service 
rendered by any watch whatever; and the same 
thing is true of other services. Social in a very 
concrete and literal sense is the operation of fixing 
prices. Only the simplest and cheapest things that 
are sold in the market at all bring just what they 
are worth to the buyers, and all articles of higher 
grade ofTer to all who buy them a surplus of service 
not offset by what is paid for them. If we rule 
out the cheapest and poorest grades of articles, 
we find all others affording a "consumers' surplus." ^ 

*It will be seen that to a man who buys the seventy-five 
dollar coat that article in its entirety is the final one of its 
kind which he will buy. He does not want a second coat 
exactly like the first. The same thing is true of the man 
who buys the five hundred dollar watch, since he does not 
think of buying more than one. In each case the first unit 
of the article bought is the last one, and it contains utilities 
which are worth more than they cost. It contains one utility 
only which is marginal in the true sense of affording no surplus 
of gain above cost. This utility stands on the boundary 
line where consumers' surpluses stop. 



CHAPTER VII 



NOEMAL VALUE 



Natural Supply. — We have attained a law of 
market value, which determines the price at which 
a given amount of any commodity will sell, and 
have taken a quick glance at the influence which 
fixes the amount that is offered and thus furnishes 
a natural standard to which the market value tends 
to conform. At any one moment the amount 
which is supplied is an exact quantity, and if it all 
has to be sold, it will bring a price which is fixed 
by the final utility of that amount of the commodity. 
If the quantity offered for sale should become greater 
or less, the final utility and the price would change. 
Final utility controls the immediate selling price, 
and if that is above the cost of production, a margin 
of gain is afforded which appeals to producers, sets 
competition working, and brings the quantity made 
up to the full amount which can be sold at cost. 
The amount of the supply itself is therefore not 
a matter of chance or caprice. It is natural that 
a certain quantity of each article should be supplied, 
and that the price should hover about the level 
which the final utility of that quantity of the good 
fixes. "Natural" or "normal" price is, in this 
view, the market price of a natural quantity. 

Cost as a Standard of Normal Price. — It is com- 
monly and correctly stated that the normal price 
of anything is that which just covers the cost of 

114 

/ 



NORMAL VALUE 115 

producing it. Cost in this case is the total amount 
of money that the entrepreneur pays out in order 
to bring the commodity into existence. He buys 
raw materials and pays for all the labor and capital 
that transform them into a new and saleable shape. 
If he can make a net profit, he does so; but com- 
petition tends to adjust the quantity produced 
and the consequent price in such a way that he can 
make no net profit. What he gets for the article 
will then reimburse him for his total outlay, but it 
will do no more. Since the quantity produced is 
normal when it brings the market price to this level 
of cost, it appears that the cost is the ultimate stand- 
ard in the case. The quantity supplied varies till 
it causes the market price just to cover the cost; 
and so long as the quantity supplied is thus natural, 
other influences remaining the same, the price is 
so. This states the cost of production in terms of 
money paid by an entrepreneur and the returns 
from the operation as money received by him; but 
there is a more philosophical way of conceiving the 
law of cost, and to this we shall soon recur. 

Elements of Cost. — Whatever the entrepreneur 
has to pay for in the production of an article is of 
course an element in its monetary cost to him. If 
he does not begin the making of it by drawing his 
raw materials from what nature freely furnishes, 
he must pay some one for the raw material. He 
must also pay for the labor, and this is equivalent 
to buying the fraction of the article that is pro- 
duced by labor ; for the laborer, as we .have seen, is 
the producer of a certain fractional share of the 
article and the natural owner of that share, and 
when he agrees to let his labor for hire, what he 



116 ESSENTIALS OF ECONOMIC THEORY 

really does is to sell out his individual interest in 
the forthcoming product of the industry in which 
he is about to engage. When a workman in a shoe 
factory agrees to work for two dollars and a half 
a day, he really contracts to sell every day for that 
amount a certain quantity of shoes. The leather 
is one element which enters into the finished shoes, 
and therefore the entire shoe is not really made 
in the factory; but of the part which is there made, 
namely, the utility that results from transforming 
the leather into shoes, one part is made by labor 
and another by capital. The entrepreneur has to 
buy both of these if he is to acquire a valid title to 
the product and have a right to sell it. These costs 
are therefore "purchase money" paid for undivided 
shares of goods. 

Labor of Management — It usually happens that 
an entrepreneur, or employer of labor and capital, 
performs some labor himself; and we have already 
noted the reason for this in the fact that the kind 
of labor that he performs is so important that the 
fate of the business often depends on it. He may 
manage the business so well as to make it succeed 
or so ill as to make it fail. He pays himself for 
this labor when he draws a salary for his services. 
As an entrepreneur he treats his own labor as he 
does that of any one else and buys the fraction of 
the product of his business that his own labor of 
management has created. In this he illustrates 
the general law that all payments of wages are 
pa3^ments of the purchase of a certain quantity of 
product. Though the owner's own contribution 
to the product is not always mentioned in terms 
in the accounting, that is what his salary is paid 



NORMAL VALUE 117 

for, though it is spoken of as a payment for his 
"time," or his labor. 

The Capitalist as the Vender of a Share in a Prod- 
uct. — Capital, as we have seen, also contributes 
a definite share toward the total amount of every 
product in the making of which it cooperates. Labor 
does not do all the transforming of leather into 
shoes which is done in the factory, since machines, 
fuel, etc., help; and we shall later find that there is 
a way of determining how much of the product 
the help so given creates. It adds a certain amount 
to what labor can claim as its own special product, 
and the man who owns the capital becomes the 
lawful claimant for this additional share. When 
he agrees to let his capital work for an employer, 
he virtually sells to the employer the undivided 
share of the product — shoes or what not — that 
the capital really creates. The furnisher of pro- 
ductive instruments, like the furnisher of labor, 
is a vender, and the entrepreneur is a buyer. 

Entrepreneur and Capitalist. — As was stated in 
an earlier chapter, an actual employer nearly always 
furnishes some of the capital that he uses. If he 
did not do so, he would have difficulty in borrowing 
more, since banks or other lenders do not loan to 
empty-handed men. It is clear that what the 
employer gets in return for such capital as he may 
put into the business is in reality a payment for 
a contribution which that particular part of the 
capital makes to the product. Since each bit of 
capital in an establishment contributes something 
toward the creating of the product, the employer's 
own capital has the same right to the value of its 
contributary share as has the capital of any one 



118 ESSENTIALS OF ECONOMIC THEORY 

else. What the employer-capitalist gets for capital 
the employer, pure and simple, pays. As the fur- 
nisher of instruments the man is a vender of the 
product of these instruments, while as an entre- 
preneur proper he is the buyer. He must purchase 
the product of his own capital just as he purchased 
the product of his own labor. In paying, therefore, 
wages for all labor, including what he performs 
himself, interest on all capital, including his own, 
and the price of raw materials, he gets something 
which, if competition does a perfect work, he has 
to sell for what he gives for it. The shoes, when 
he sells them, tend, under active competition, to 
yield only what has been paid for them in the mak- 
ing and, in a perfectly static state, would actually 
yield no net profit. All the entrepreneur's costs, 
therefore, resolve themselves into purchase money 
paid, his receipts are money accruing from sales; 
and under ideally free competition the two sums 
total are equal. 

The Entrepreneur's Proper Function not Labor of 
Management. — In some theoretical discussions . the 
management of a business figures as the principal 
function of the entrepreneur, and all or nearly all of 
the reward that comes to him is represented as 
coming in the shape of a reward for a responsible 
kind of labor that calls great abilities into requisi- 
tion. But it is very clear that, whether he per- 
sonally performs any labor or not, the employer 
has a distinctly mercantile function to perform; 
and this in itself is totally unlike the work of over- 
seeing the mill, the shop, or the salesroom. He 
acquires a title to the whole product by paying 
for the contributions which labor and producers 



NORMAL VALUE 119 

of raw material separately make toward it, and then 
parts with the product; and if he gets any more 
than he has paid out, he makes a profit. When 
industry is in what we have termed a dynamic 
state, such a difference between the value of the 
product and the cost of the elements that go into 
it is continually appearing, and that, too, largely 
in consequence of causes over which, as a mere 
manager, the employer has no control. A profit 
so gained cannot be wages of management. It is 
a purely commercial gain, or a difference between 
what is paid for something and what is received 
for it. 

Mercantile Profit. — It is best, therefore, to dis- 
tinguish in some perfectly clear way between that 
function of the entrepreneur, which consists in buy- 
ing and selling, and any work that he may find it 
best to do in the way of superintending the busi- 
ness. At the cost of using the term entrepreneur 
in a stricter sense than the one customarily attached 
to it, we will make this word describe the purely 
mercantile functionary who pays for the elements 
of a product and then sells the product. The reason 
for the very division between gains from this source 
and gains from management we shall soon appre- 
ciate, for we shall see that competition tends to 
reduce one of these incomes to nothing, but tends 
to perpetuate the other and to make the amount of 
it conform to a positive standard. The entrepre- 
neur, as we shall use the term, is neither the manager 
nor the capitalist, and when we have occasion to 
speak of either of these functionaries, we shall call 
him by his own distinctive name; though we know 
perfectly well that, in actual business, it is desir- 



120 ESSENTIALS OP ECONOMIC THEORY 

able and often quite essential that the same one 
who acts as an entrepreneur should also put into 
the business some labor as well as some capital. 
A man who performs two unlike functions, buying 
and selling, on the one hand, and managing the 
business, on the other, serves in two capacities that 
are clearly distinguished from each other; while if 
he furnishes any of the capital, he adds to these 
a third capacity entitling him to the value of the 
product of his capital. As a manager he directly 
aids in producing goods, and he gets pay for so 
doing from his other self, the entrepreneur, who 
acquires the title to the goods; as a capitalist he 
has another legitimate claim upon himself as 
entrepreneur. 

These Distinctions recognized in Practical Ac- 
counting. — That this is no bit of mere theoretical 
subtlety is proved by the fact that the bookkeep- 
ing of nearly all establishments distinguishes be- 
tween these two incomes by actually putting an 
appraisal on the work the employer does and pay- 
ing a salary for it. A man may be a large owner 
of stock in a corporation and yet receive a salary 
that is fixed by an estimate of what an equally 
useful man could be hired for. If personal influence 
secures more for him than this, the excess is taken 
from the pockets of the stockholders, and the amount 
of it is accounted for in a way that does not fall 
within the scope of pure economic law. 

How "Natural" Prices exclude Entrepreneur's 
Profits. — The old and correct view is that the 
tendency of competition is to make things sell for 
enough to cover all costs, as we have defined them, 
and no more. Under a different phraseology this 



NORMAL VALUE 121 

is what Ricardo and others have rightly claimed. 
They were unconsciously explaining what would 
happen in a static state, for if society were actually 
in this state,, the goods that come out of the factory 
would be worth just enough to reimburse the owner 
for all the outlays that can be called costs. If they 
sell for more than this, there is to be had from the 
business an income that costs nothing. It is a net 
profit above all claims based on personal labor or 
on the aid furnished by capital, and it furnishes 
an incentive for enlarging the business, and labor 
and capital are therefore drawn into it. Entre- 
preneurs bring them and for a time make a profit 
by this means; but as their presence increases the 
output of goods that are here made, it brings down 
the price till there is no inducement to move any 
more labor and capital in this direction. 

The Significance of a Natural Adjustment of Dif- 
ferent Industries. — The ''natural" state of general 
industry is that in which each particular branch of 
it is in the no-profit state. It is as though laborers 
and capitalists in a shoe factory took aU the shoes 
that it turns out, sold them in a market, paid for the 
raw material out of the proceeds, and kept the re- 
mainder, dividing it between themselves in pro- 
portions which corresponded with the amounts 
they had severally contributed toward the making 
of this product; and as though the laborers in 
cotton mills and iron foundries received the goods 
there made and dealt with them in a like manner. 
It is as though in every branch of business the whole 
product were turned over in kind to the furnishers 
of labor and capital. 

The Entrepreneur a Passive Functionary under 



122 ESSENTIALS OF ECONOMIC THEORY 

Static Conditions. — Purely passive is the function of 
the entrepreneur under static conditions. In so far 
as any effect on his income is concerned he might as 
well reside in a foreign land as in the one where his 
business is located, provided always that the manage- 
ment were unaffected. When the same man is both 
entrepreneur and manager, the absence of the first of 
these functionaries would mean the absence also of 
the second, and that would cause trouble; but the 
purely mercantile operation of getting a title to a 
product and then surrendering it can be carried on as 
well in one place as in another. The entrepreneur in 
his capacity of buyer and seller does not even do the 
work which purchases and sales involve. That is 
commonly done by agents. Some of it, of course, 
may be done by the responsible manager himself, 
and if that person is also the entrepreneur, it follows 
that he does a part of the commercial labor of his 
business. In this, however, he goes beyond his func- 
tion as entrepreneur. In that capacity he does, as 
we have said, no labor of any kind. Sales and pur- 
chases are made in his name, but he does none of the 
work that leads up to them.^ 

* The holders of common stock in a corporation are always 
entrepreneurs, and they are also capitalists if the stock rep- 
resents any real capital actually paid in. If the bonds and 
the preferred stock represent all the real capital that there is, 
any dividends that may be paid on the common stock are 
a pure entrepreneur's profit. If, on the other hand, the 
stock all represents money actually put into the business, 
the dividends on it contain an element of net profit if they 
exceed simple interest on the capital and insurance against 
the risks that are not guarded against by actual insurance 
policies. If the rate of simple interest is four per cent, and 
the value of the unavoidable risk is one per cent, then a divi- 
dend of six per cent contains a pure entrepreneur's profit 



NORMAL VALUE 123 

How the Entrepreneur contributes to Production 
under Dynamic Conditions. — In a dynamic state the 
entrepreneur emerges from this passive position. 
He makes the supreme decisions which now and 
again lead to changes in the business. "Shall we 
adopt this new machine?" "Shall we make this 
new product?" "Shall we enter this new market?" 
are questions which are referred to him, and on the 

of one per cent. In dynamic conditions such a return is 
often to be expected, and we shall soon study the conditions 
that afford it. 

In the present study we do not need to consider risks, 
inasmuch as the greater part of them arise from dynamic 
causes; that is, from the changes and disturbances to which 
the business world is subject. An invention promises greatly 
to cheapen the production of some article and, for a time, 
to insure large returns for the men who first utilize it. A 
capitalist may be willing to take a risk for the sake of shar- 
ing this gain; but in time both the risk and the gain will 
vanish. The capacity of the new appliances will have to 
be tested, a market for their output found, etc. A small 
remainder of risk is still entailed upon the capitalist if he 
leaves his money in this business. The death of the manag- 
ing partner, the defaulting of payments for goods sold, the 
chances of unwise or dishonest conduct on the part of clerks 
or overseers, always impend over a business, but these dangers 
are at a minimum when the man who is at the head of the 
force of managers has capital of his own in the business. 
Risks are at a static level only when they are thus reduced; 
and for our present purpose it is best to consider that com- 
petition has eliminated the establishments where any reck- 
lessness has been shown in the management, and that the 
unavoidable remainder of risk resolves itself, nearly enough 
for practical purposes, into a deduction from the product which 
the surviving establishments turn out in a long period of 
time. A small percentage of their annual gains, set aside 
for meeting unavoidable losses, will make good these losses 
as they occur and leave the businesses in a condition in which 
they can yield as a steady return to owners of stock, to lend- 
ers of further capital, and to laborers all of their real product. 



124 ESSENTIALS OF ECONOMIC THEORY 

decisions he reaches depends the prospects of profit 
for the business. This activity is not ordinary labor, 
but in a true sense it is a productive activity, since 
it results in placing labor and capital where they 
can produce more than they have done and more 
than they could do were it not for the enabling act 
of the entrepreneur which places them on a vantage 
ground of superiority. This subject will be discussed 
in a later chapter and in connection with other phases 
of economic dynamics. 

Values at a Static Level only when Entrepreneurs' 
Gains are Nil. — Any net profit on an entrepreneur's 
part means that his product is selling for more than 
the elements of it have cost him. But this is a con- 
dition which, if labor and capital are as mobile as the 
static hypothesis requires that they should be, will 
cause this entrepreneur and others to move labor and 
capital into his industry, thus increasing its output 
and lowering the selling price of its product. If there 
is no such action going on, it shows that the entre- 
preneurs have no incentive for taking it. 

Values at a Static Level only when the Gains of 
Labor in the Different Industries are Equalized. — 
If labor is creating more in one subgroup than in 
others, as it often is in a dynamic condition, that fact 
means that some entrepreneurs are making a profit, 
and, according to the principle stated in the preced- 
ing paragraph, this means that values are not at their 
static or "natural" level. If, owing to new methods 
or to some other cause, a given amount of labor ^ in 

* In measuring labor we, of course, take account of the 
quality of the men who perform it, and the work of a skillful 
man is counted as more units of labor than that of an un- 
skillful one. 



NORMAL VALUE 125 

the subgroup that produced the k"' of our table 
creates an amount of that product which sells for more 
than the B"' or the C" which labor of like quantity 
makes, then the manufacturers of K'" would obviously 
get a margin of profit. They would not be obliged to 
pay for labor any more than the market rate, and that, 
as we shall see, cannot exceed what labor produces in 
the groups W and 0'\ In A'" the labor creates 
more and the employer pockets the difference. In 
saying this we assume one fact which we undertake 
later to prove ; namely, that there is a definite amount 
of each product which can be attributed to labor 
alone as its producer. Capital and labor work to- 
gether, but each is, in effect, the creator of a certain 
fraction of their joint product. 

Values Static only when the Gains of Capital 
in Different Industries are Equalized. — If capital 
is creating more in one industry than in another, 
there is a margin of profit for the entrepreneurs 
in the exceptionally productive industry. They 
pay as interest on the capital they use only the 
market ' rate, which is what equal amounts of 
capital can produce and get elsewhere. If they 
produce more in the one group, the entrepreneurs there 
can pocket the excess as they did in the case of the 
product of labor. We assume that there is everywhere 
a definite product that can be attributed to capital 
alone. 

Values Normal when Moneys paid out hy Entre- 
preneurs equal Moneys Received. — In the preceding 
paragraphs we have spoken of exchange values as 
being static under certain conditions, but we might 
have expressed the essential fact by saying that 
prices are static under these conditions since the money 



126 ESSENTIALS OF ECONOMIC THEORY 

a product brings is a true expression of its value. 
If A!" sells for as many dollars as does ^"' , the two 
things exchange for each other. In like manner the 
product of labor and that of capital may be expressed 
in terms of money, since the quantities of goods which 
they respectively make sell for certain sums. Wages 
and interest are nearly always conceived in terms 
of money. The commercial mode of computing costs 
of production and returns from production is to 
translate them into moneys paid by entrepreneurs 
and moneys received. 

Costs of Production as related to Static Incomes. — 
What to an entrepreneur are costs are to workmen 
and capitalists incomes. The one pays out wages 
and interest, and the others get them; and these two 
sums are normal when together they equal the prices 
received for goods produced. The entrepreneur is the 
universal paymaster, and in a static condition all 
incomes come from his hand. 



CHAPTER VIII 

WAGES 

The Equilibrium of Industrial Groups. — The differ- 
ent industrial groups are in equilibrium when they 
attract labor and capital equally, and that occurs 
when these agents produce as much per unit employed 
in one group as in another. Such equalized pro- 
ductivity is the bottom fact of a static condition, and^ 
equalized pay follows from it. Wages and interest 
tend to be uniform in all the groups. Efficient labor, 
of course, gets in any employment more than ineffi- 
cient ; but labor of a given grade gets in all the groups 
that make up industrial society a uniform rate of 
pay, and nothing is to be gained by any capitalist 
or by any laborer by moving from one employment 
to another. They all therefore stay where they are, 
not because they cannot move freely if they wish to 
do so, but because no inducement to move is offered to 
them. This is a condition of perfect mobility with- 
out motion — of atoms ready to move at a touch with- 
out the touch that would move them. The paradox ' 
indeed holds that it is the ideally perfect mobility 
which has existed in the past which positively ex- 
cludes motion in the present. At some time in the 
past labor and capital have gone from group to group 
till they have brought about an adjustment in which 
they have no incentive for moving farther. The 
surface of a pool of water is kept tranquil, not because 
the water is not perfectly fluid, but because, in spite 

127 



128 ESSENTIALS OF ECONOMIC THEORY 

of the fact that it can flow with entire freedom in any 
direction if it is impelled more in that direction than 
in any other, each particle of it is impelled equally 
in all directions. It is the perfect equilibrium that 
keeps the particles from changing their places, and 
fluidity has caused the equilibrium. In like manner 
when labor and capital can create and get just as 
much in one place as in another, they are attracted as 
strongly in one direction as in another and therefore 
do not move. A young man of average capacity, 
who is deliberating upon the choice of an occupation, 
will find that he can do as well in a cotton mill as he 
can in a shoe factory, a machine shop, a lumber mill, 
a flouring mill, or any other industrial establishment 
requiring his particular grade of capacity. This is 
the picture of a perfectly static industrial condition. 
Economic science has to account for values, wages, and 
interest as they would be in such a condition, however 
impossible it is that society should ever reach exactly 
such a state. The values, wages, and interest in a 
real market are forever tending toward the rates that 
would be established if the static condition were 
realized. 

/ The Sign of a Static State. — The sign of the exist- 
ence of a static condition is, therefore, that labor and 
capital, though they are perfectly free to move from 
one employment to another and would actually do 
so on the slightest inducement, still do not move. 
They stay where they are because they cannot find 
places where they can produce the slightest amount 
in excess of what they now produce, and no employer 
will anywhere offer any excess above the prevailing 
rate of pay. 
Profits and the Movements they induce the Sign of a 



WAGES 129 

Dynamic State. — Entrepreneur's profits, when they/^ 
exist, mean that this equilibrium is disturbed, and 
when it is so, mobility of labor and capital affords the 
guaranty that a new equilibrium will be established 
if no further disturbances follow. As we have said, 
profits attract labor and capital, increase the output 
of those goods which yield the profit, and reduce the 
prices of them to the no-profit level. Workmen and 
capitalists then get from the entrepreneur as wages and 
interest all that he gets from the public as the price 
of his goods, except what he pays for raw materials.^ 
In other words, the employer sells his goods at cost. 

1 The entrepreneur of A' of our table must buy the A in 
order to impart to it that utility which is his own particular 
contribution. He pays as wages and interest all that he gets 
for this contribution. The true product of the entrepreneur is 
not the entire price of the A', but is the difference between 
that and the price of the A. The entire amount received 
for the A' resolves itself into wages, interest, and cost of A; 
but as a rule the price of A resolves itself practically into 
wages and interest only, and when it does so, all that is paid 
for the A' ultimately takes these forms. The same is then 
true of the finished product A'". The entire price of it is 
ultimately resolvable into wages and interest; and in speak- 
ing of the product of an entire group we do not need to make 
any reservation for raw materials. 

The case in which this statement requires qualification 
is that in which the material in its rawest state still has value, 
as is the case with ore and mineral oil contained in the earth 
but not a true part of land in the economic sense, since they 
are exhausted in the using. The price of a product into 
which these elements enter includes something that repre- 
sents the value which they have in situ and before any labor 
has been expended on them. It is true even in these cases 
that the value of the product is measured in terms of wages 
and interest, provided that the exhaustible elements such 
as ore, oil, etc., are capable of being replenished, or provided 
that an effective substitute for them is in process of produc- 
tion by means of labor and capital. The natural raw material 
is then worth what the artificial substitute costs in terms of 

K 



130 ESSENTIALS OF ECONOMIC THEORY 

How Costs are Determined. — The early studies of 
"natural" values, or values which conform to costs 
of production, were unconscious and imperfect at- 
tempts to attain the laws of value in a static state. 
In such a state costs resolve themselves into wages and 
interest, and the conception of such a static state is 
therefore not complete unless we know how wages 
and interest themselves are determined. What we 
have already said implies that they fluctuate about 
certain standards, just as do the prices of goods, and 
that they would remain at these standards if society 
were reduced to a static condition. 

Significance of Static Law in a Dynamic State. — 
An actual society is undergoing constant disturbances. 
It is very far from being static; and yet values of 
goods, on the one hand, and the earnings of labor and 
capital, on the other, hover within a certain distance 
of the standards which would be realized if the society 
became static. In spite of active dynamic move- 
ments the general returns of labor and capital can 
never range so far from these theoretical amounts that 
the distance from them cannot in some way be meas- 
^ured and accounted for. The sea, when gales are 
blowing and tides are rising and falling, is anything 
but a static object, and yet it keeps a general level 
in spite of storms and tides, and the surface of it as a 
whole is surprisingly near to the ideal mathematical 
surface that would be presented if all disturbances 
were to cease. In like manner there are certain 
influences that are disturbing the economic equihbrium 

capital and labor, and the finished product which contains 
some of the natural material sells for the amount which the 
finished product costs, which is made altogether by labor and 
capital applied to valueless elements in nature. 



WAGES 131 

just as storms and tidal waves disturb the equilibrium 
of the sea. We cannot actually stop these influences 
any more than we can stay the winds and the lunar 
attraction; but we can create an imaginary static 
state for scientific purposes, just as a physicist by a 
process of calculation can create a hypothetical static 
condition of the sea and discover the level from which 
heights and depths should be measured. No more 
than the economist can he actually bring the subject 
he is dealing with to a motionless condition. The 
economic ocean will defy any modern Canute who 
may try to stop its movements; but it is necessary 
to know what shape and level it would take if this 
were done. 

Influences that disturb the Static Equilibrium. — 
The influences that disturb the economic equilibrium^^^^ 
are, in general, five. The population of the world 
increases, and this is one influence which prevents 
values, wages, and interest from subsiding to per- 
fectly ''natural" standards. Capital is increasing, 
and this influence also acts as a disturbing factor. 
The methods of producing things change, and the 
changes have a very powerful effect in preventing the 
attainment of a static equilibrium. New modes of 
organizing different industries are coming into vogue, 
and this causes a further disturbance of the economic 
adjustment. The wants of men are by no means 
fixed ; they change, multiply, and act on the economic 
condition of society in a way that affects the static 
adjustment. Even physical nature undergoes change, 
and the perishable part of the earth does so in a dis- 
quieting way. We are using up much of our natural 
inheritance. As the effect of this appears chiefly 
in forcing us to change our processes of production, we 



132 ESSENTIALS OF ECONOMIC THEORY 

shall, for convenience, limit our study to the five 
changes here enumerated. 

Movement Inevitable in the Dynamic State. — These 
influences reveal their presence by making labor and 
capital more productive in some places than they are 
in others, and by causing them ever and anon to move 
from places of less productiveness to places where 
gains are greater. As we have said, this moving of 
labor and capital to and fro is, like currents in the 
sea, a sign of a dynamic condition. As in the static 
state these agents would not thus move, however 
fluid and mobile they might be, so in a dynamic 
state they are bound to move, because their earning 
powers do not remain long exactly equal in any two 
employments, and they go now hither and now yon, 
as, in the changeful system, openings for increased 
gains present themselves. If commodities were 
everywhere selling at cost prices and if wages and 
interest were everywhere normal and uniform, labor 
and capital would not move to and fro, and this would 
be a proof that dynamic influences were absent. 

How an Imaginary Static Society is Created. — If 
we wish to discover to what standard the values of 
goods, on the one hand, and the rewards of labor and 
capital, on the other, continually tend to conform, 
we must create an imaginary society in which popula- 
' tion neither increases nor diminishes, in which capital 
is fixed in amount, in which the method of making 
goods does not change, in which the mode of organiz- 
ing industry continues without alteration, and in 
which the wants of consumers never vary in number, 
in kind, or in intensity. 

Costs of Production in a Static State. — We have 
said that in such a static state the prices of different 



WAGES 133 

products are just high enough to cover the wages and '^ 
interest which are generally paid. There are uniform 
or all-around rates of pay for labor and for capital, 
and every man who hires workmen or gets loans from 
a bank has to pay them. In the real world, full as 
it is of disturbances, and given over as it is to forces 
of change and progress, we find that values, wages, 
and interest are in general surprisingly near to these 
standards. In a particular business products may 
for a time sell for enough to afford a large surplus 
above prevailing wages and interest, and business as 
a whole may, for a time, yield some such surplus; 
but in the absence of monopolistic privileges no one"^ 
business yields a large surplus for a long time, and 
still less does business as a whole do so, though profits 
may always be found somewhere within the system. 

The Final Productivity of Labor. — If we assume '• 
that the capital of society is a fixed amount, we may 
perform an imaginary experiment which will show 
how much labor really produces. We may set men 
at work, a few at a time, until they are all employed, 
and we may measure the product of each of the de- 
tachments. We should make the different sections , 
of the working force as similar to each other as it is 
possible to make them and call each section a unit 
of labor. If there were ten such divisions and if the 
quantity of capital were sufficient to equip them all 
on the scale on which laborers are at present actually 
equipped, it is clear that this amount of capital, when 
it was lavished on one single section, must have sup- 
plied it with instruments of production in nearly 
inconceivable profusion. What we should to-day 
regard as a fair complement of capital for a thousand 
men would nearly glut the wants of a hundred, and 



134 ESSENTIALS OF ECONOMIC THEORY 

yet it is thinkable that it should take such forms that 
they would be able to use it. 

Productivity of the First Unit of Labor. — We will 
set at work one section which we have called one unit 
of labor and will put into the hands of its members 
the whole capital which is designed ultimately to 
equip the ten sections. It is very clear that the 
forms that this capital will take cannot be the same 
that it will have to take when the entire working 
force is using it. Indeed, we shall have to tax our 
ingenuity to devise ways in which one unit of labor 
_can utilize the capital that will ultimately be used 
by ten. The tools and machines will have to be few 
in number but very costly and perfect. We shall have 
to resort to every device that will make a machine 
nearly automatic and cause it to exact very little 
attention from the .person who tends it. The build- 
ings will have to be of the most substantial and du- 
rable kind. We shall have to spend money without 
stint wherever the spending of it will make labor more 
productive than it would otherwise be. If we do 
this, however, the product of the labor and its equip- 
ment will be a very large one. The industry will 
succeed in turning out indefinitely more goods than a 
modern industry actually does, and the reason for it 
will be that the workmen have capital placed in their 
hands in unparalleled profusion. 

The Product of the Second Unit of Labor. — We will 
now introduce a second unit of labor, by doubling 
the number of workers, without changing the amount 
ybi the capital. We must, of course, change the forms 
^;of the capital, or it cannot be advantageously used by 
the larger working force. The buildings will have to 
be larger, and if they are to be erected with about the 



WAGES 135 

same amount of capital as was formerly used, they 
must be built in a cheaper way. Tools of every sort 
must be more numerous, and this larger number of 
tools, if it is to represent the same investment of 
capital that the former number embodied, must also 
be simpler and cheaper. The whole equipment of 
capital goods will have to undergo a complete trans- 
mutation ; but the essential thing is that the amount 
of the capital should not be changed. 

A Provisional Mode of Measuring Capital. — In 
measuring the amount of the capital we are obliged 
to use a unit of cost, and in the illustration we have 
assumed that the cost can be measured in dollars. 
The productive fund consisted at the outset of a cer- 
tain number of dollars invested in productive opera- 
tions. This is only a provisional mode of measuring 
it. The money spent really represents sacrifice in- 
curred, and we shall find that the only kind of sacrifice 
that is available for measuring the cost of goods of any 
kind is that which is incurred by labor. Ultimate 
measurements of wealth in all its forms have to be- 
made in terms of labor. Such measurements have 
presented difficulties, and the attempt to make them 
has led to serious fallacies. We shall see, in due 
time, how these fallacies can be avoided. 

The Law of Diminishing Productivity. — Under 
these conditions the second unit of labor will add 
something to the amount that was produced by the 
first unit, but it will not cause the product to become 
double what it was. It could not do that unless the 
capital also were doubled. Each unit of labor is now 
cooperating with one half of the original capital, and 
the total product is less than it would have been if the 
new labor, on entering the field, had brought with it 



136 ESSENTIALS OF ECONOMIC THEORY 

as full an equipment of productive instruments as 
was possessed by the labor that preceded it. Adding 
to the industry a second unit of labor without adding 
anything to the capital makes the total product 
somewhat larger, but falls short of doubling it. If we 
credit to this second unit of labor what it adds to the 
product that was created before it came into the field, 
we shall find that it is a certain positive amount, but 
obviously less than the total product which was real- 
ized by the first unit and all the capital. It is even 
less than a half of the product of the two units using 
all the capital. Perhaps the first unit of labor, when 

^t used all the capital, created ten units of product; 
while the two units of labor, using this same original 
amount of capital, produce sixteen units of product. 
The clear addition to the original product which is 
caused by the added labor of the second squad of 
workmen is only six units, while a half of the total 
product after the addition to the labor has been made 
is eight. This figure represents the amount we may 
attribute to one unit of labor and a half of the total 
capital, while six represent what is causally due to one 

/unit of bare labor only. With all the capital and one 
unit of labor we get ten units of product, while the 
addition of one unit of bare labor brings the total 
amount up to sixteen. Six units find the cause of 
their existence in the presence of the second unit of 
labor, and the second unit therefore shows, as com- 

/ pared with the first, a diminished productivity. 

Product of the Third Unit of Labor. — We will now 
introduce a third ,unit of labor, leaving the amount 
of capital still unchanged, but again altering the forms 
of it so as to adapt them to the needs of a still larger 
working force. We will make the buildings larger 



WAGES 137 

and therefore, of necessity, cheaper in their forms and 
materials. We will make the tools and machines more 
numerous and simple, and will do everything that is 
necessary in order to make the fixed amount of capital 

— the fund amounting to a given number of " dollars " 

— embody itself in the number and the kinds of capi- 
tal goods that are requisite in order to supply three 
times the original number of workmen. The third . 
unit of labor now adds something to the product real- 
ized by the first two, but the addition is smaller than 
it was in the case of the second unit. 

Products of a Series of Units of Labor. — If we con- 
tinue this process till we have ten units of labor, em- 
ploying the same amount of capital as was formerly 
used by one, we shall find that each unit as it begins 
to work adds less to the previous product than did 
the unit which preceded it, and that the tenth unit 
adds the least of all. 

Care must be taken not to confound the additioi/ 
that is made to the product in consequence of the 
additional working force with the amount which, 
after the enlargement of the force, is created by the 
last unit of labor a7id its pro rata share of the capital/ 
When the tenth unit of labor is working, it is using a 
tenth of the capital and the two together create a 
tenth of the product. This is more than the amount 
which is added to the product by the advent of the 
tenth unit of labor. That addition is merely the dif- 
ference between the product of all the capital and nine 
units of labor and that of all the capital and ten units 
of labor. This extra product can be attributed en-' 
tirely to the increment of labor. 

It is also carefully to be noted that when the units 
are all working together, their products are equal and 



|38 ESSENTIALS OF ECONOMIC THEORY 

the particular one which happened to arrive last is 
not less productive than the others. Each one of 
them is now less productive than each one of the force 
of nine was under the earlier conditions. In like man- 
ner each unit of the nine is less productive than was, 
in the still earlier period, each unit of the force of eight. 
At any one period, all units produce the same amount. 
At any one period, then, what any one unit of labor 
produces by the aid of its pro rata share of the capital 
is a larger amount than what each can be regarded as 
producing by itself. Though one of ten units creates, 
with the aid of a tenth of the capital, a tenth of the 
product, of itself it creates less ; for we can only regard 
as its own product what it adds to the product that 
was creating before it arrived on the scene. It is 
the bare product of a unit of labor alone that we are 
seeking to distinguish from other elements in the 
general output of the industry, and that consists in 
the difference between what nine units of labor and 
all the capital can produce, and what ten units of 
labor and all the capital can produce. 

We will consider the amount of capital fixed and 
let the amount of labor increase along the line AE, 
and we will let the product of successive units of labor 
be measured by the vertical distance from the points 
on the line AE to the descending curve CD. AC is 
the product of the first unit of labor. The product 
of later units is measured by lines to the right of AC 
and parallel with it, which grow shorter as the num- 
ber of units increases. ED is the product of the last 
unit. In each case we impute to an increment of 
labor whatever amount of product its presence adds 
to that which was created before. 

Summary of Essential Facts. — The facts that are 



WAGES 



139 



to be remembered then are: first, that the capital 
remains fixed in amount, though the forms of it change 
as the number of units of labor increases; secondly, 
that that which we call the product of a unit of labor 
is what that unit, coming into the field without any 
capital, can add to the product of the labor and capital 
that were there before; 
and thirdly, that this 
specific product of labor 
grows smaller as the 
amount of labor grows 
larger, rendering the 
product of the last unit 
the smallest of all. 
When the tenth and 
last unit is working, 
each one of the nine 
earlier units is, of itself, 

producing no more than does the final one, though 
it formerly produced more because of the larger 
quota of capital with which it was formerly supplied. 
The Test of Final Productivity. — There are now at 
work ten units of capital and ten of labor, and we 
cannot go through the process of building up the work- 
ing force from the beginning. How, then, do we 
measure the true product of a single unit of labor? 
By withdrawing that unit, letting the industry go on 
by the aid of all the capital and one unit of labor the 
less. Whatever one of the ten units of labor we take 
away we leave only nine working. If the forms of 
the capital change so as to allow the nine units to use 
it advantageously, the product will not be reduced 
to nine tenths of its former size, but it will still be 
reduced ; and the amount of the diminution measures 




140 ESSENTIALS OF ECONOMIC THEORY 

the amount of product that can be attributed to one 
unit of bare labor. Or we may add a certain num- 
ber of workmen to a social force already at work, 
making no change in the amount of the capital, — 
though changing its forms, — and see how much 
additional product we get. That also is a test of 
final productivity. It gives the same measurement 
as does the experiment of taking away the little 
detachment of men and seeing how much the product 
shrinks. By either process we measure an amount 
that is attributable altogether to bare labor and not 
to capital. 

The whole area BCD in the diagram is an amount 
of product that is attributable to capital and not to 
labor. It represents the total surplus produced by 
labor and capital over the amount that can be traced 
to the labor alone. The product of all the capital 
and all the labor minus ten times the product of a 
single unit of labor is the amount that is attribu- 
table to the productive fund only. 

The area ABDE represents this amount. The last 
unit of labor creates the amount DE and the number of 
units is represented by the amount AE. All of them 
are now equally productive and what all create, as 
apart from what capital creates, is the amount ABDE. 

Only the Final Part of this Mode of gathering a Work- 
ing Force practically resorted To. — The process of 
building up the working force from a single unit 
is imaginary. In practical life we see the process 
only in its final stage. Entrepreneurs do continu- 
ally have to test the effect of making their work- 
ing forces a little larger or a little smaller, and in 
so doing they test the final productivity of labor; 
and this is all that is necessary. Tracing the process 



WAGES 141 

of building up the force of labor unit by unit reveals 
a law which is important, namely, that of the dimin- 
ishing productivity of single units of labor as the 
number of units increases. If we crowd the world full 
of people but do not proportionately multiply working 
appliances of every kind, we shall make labor poorer. 

Why a Detachment of Laborers rather than One Man 
is treated as a Unit of Labor. — In making up the force 
of workers we might have treated each individual as 
a unit; but we have preferred to call a detachment 
a unit in order that the symmetry of the force might 
be preserved. Even though we were studying only 
a single mill it would have its departments, and it 
would be desirable that, when we enlarge the force 
of men, we should be able without difficulty to give 
to each part of the mill its fair share of the new 
laborers. If it were a shoe factory, we should need 
to add lasters, welters, sewers of uppers, etc., in a 
certain proportionate way, in order that one part of 
the mill might not get ahead of another and pile up 
unfinished products faster than they could be taken 
and completed. 

In the last analysis the law applies to the industry 
of all society. The final unit in the case consists of 
shoemakers, cotton spinners, builders, foundrymen, 
miners, cultivators, etc., and of men of all subtrades 
included in the general calHngs. As the composite 
detachments come into the field, they apportion them- 
selves among all the occupations that are represented, 
and that too in nicely adjusted proportions. We 
shall see in due time how this adjustment of the sev- 
eral shares of the social force of laborers is practically 
made. 

The Law of Final Productivity Applicable to the 



142 ESSENTIALS OF ECONOMIC THEORY 

Labor of Society. — The law of final productivity 
applies to every mill, shop, or mine separately con- 
sidered. If its capital remains fixed in amount, 
units of labor produce less and less as they become 
more numerous. The product of any unit at any one 
time may be measured by taking it away and seeing 
how m uch the output of the establishment is reduced. 
The law, however, applies to all the mills, shops, 
mines, etc., considered as a social complex of working 
establishments. As the working society grows larger 
without growing richer in the aggregate, the power 
of labor to produce goods of all kinds grows less. At 
any one time this producing power is measured by tak- 
ing away from every working establishment a number 
of its operatives and ascertaining how much less is pro- 
duced after the withdrawal. Such a test on the social 
scale is never made consciously. Each employer can 
test in an approximate way the effect of reducing his 
own force, and the effect of gradually enlarging it, and 
there are influences at work which result in enlarging 
one industrj^ when others are enlarged and in causing 
the final productivity of labor to be uniform in all. A 
shoe manufacturer can tell, in a general way, how 
much an extra man or two will be worth to him. It 
is possible to ascertain by experience about what 
number of shoes that additional labor will, in a year, 
add to the output of the shoe factory or the number 
of tons of steel it will add to the present annual out- 
put of a furnace. When these products vary in the 
case of different shops, the men are called to the points 
where the apparent additions are largest, and the 
constant tendency is toward a level of productive 
power. The building up of an imaginary force from 
the beginning presents, in a clear and emphatic way, 



WAGES 



143 



the fact that the specific productivity of labor grows 
less as, other things remaining the same, workers 
become more numerous. We should know on a 
priori grounds that this must be the fact; but we 
can verify it by observation and statistical inquiry. 
Where men are numerous and land and tools are 
scarce, labor is comparatively unproductive; and it 
is highly productive where land and tools are plenti- 
ful. There is no doubt that crowding the world full 
of people, without providing the world with capital 
in a proportionate way, would impoverish everybody 
whose income depends on labor. 

The Law of Wages. — Even though labor creates 
the amount ABDE, it 
is not yet perfectly 
clear that it will be able 
to get that amount. 
For aught we now know 
the entrepreneur may 
keep some of it, and for 
aught we know he may 
keep some of the quan- 
tity BCD which is dis- 
tinctly the product of 
capital. Let us see whether he can in reality with- 
hold any part of ABDE, which is the product of 
labor. 

Wages under Perfect Competition. — In the static 
state that we have assumed, competition works with- 
out let or hindrance. It does not work thus in the 
actual world, and we shall in due time take account 
of the obstacles it encounters-; but what we are now 
studying is the standards to which such competition 
as there is — and it is in reality very active — is 




144 ESSENTIALS OF ECONOMIC THEOP:Y 

tending to make wages conform. We want to know 
what would happen in case this competition encoun- 
tered no hindrance at all. This would require that 
a workman should be able to set employers bidding 
against each other for his services just as actively 
as an employer can make laborers bid against each 
other in selling their services. If this were the case, 
every unit of labor could get what it produces, no 
more and no less. Even a single man, offering him- 
self to one employer after another, would virtually 
carry in his hands a potential product for sale. His 
coming to any man's mill would mean more goods 
turned out in a year by the mill ; and if one employer 
would not pay him for them at their market value, 
another one would. The final unit of social labor 
can get, under perfectly free competition, the value of 
whatever things that labor, considered apart from 
capital, brings into existence. Moreover, each unit 
of labor by itself alone now produces, as we have 
seen, the same amount of commodity as the final 
unit, and can get the price of it. Now that they are 
all working together each one of them can place itself 
in the position of the final unit by leaving its present 
employment and offering its services elsewhere. 

Wages regarded as Prices of Fractional Products 
adjusted by Perfect Competition. — Under the hypoth- 
esis of perfect competition, as the term has been used 
in our discussion, the venders of goods can get their 
market values. These values are fixed by the final 
utility law. Free competition means, then, not only 
that any average laborer who offers himself for hire 
virtually carries in his hands a potential but definite 
product for sale, but that he may confidently offer it 
at the price that is fixed by its final utility. Like 



WAGES 145 

other venders, the laborer can get the true value of his 
product and he can get no more. In an ideally per- 
fect society organized on the competitive plan a man 
would be as dependent on his own productive power 
as he would be if he were alone in a wilderness. His 
pay would be his product ; but that would be indefi- 
nitely larger than it could be in- a wilderness or in any 
primitive state. The capital of other men and the 
organization that they maintain enable a worker to 
create and get far more than he could if he lived alone, 
even though, like Crusoe, he were monarch of his 
whole environment. It would be a losing bargain for 
the worker to surrender the product of mere labor 
in a state of civilization in exchange for what both 
labor and capital create in a state of savagery. 



CHAPTER IX 

THE LAW OF INTEREST 

The product of the final unit of labor — an amount 
which in practice is measured without any tracing of 
the previous growth of the working force — sets the 
standard of the rate of wages. We have now to see 
that the rate of interest has a similar basis; and yet 
it is worth while to build up, wholly in imagination, 
a fund of capital, just as we have made up the force 
of laborers, increment by increment. This will have 
the incidental effect of illustrating another way in 
which wages may be determined. 

Interest as a Residual Amount. — The area BCD in 
our former figure represents the difference between 
the total product of an industry and the wages paid 
to laborers. If there is no net profit accruing to the 
entrepreneur, this area must represent interest. It is 
what is left for the capitalist on the supposition that 
he and the laborer together get all that there is. If 
the goods sell for what they cost, this must be the fact, 
and the amount represented by BCD has thus to go 
to capital, since, by a rule of exclusion, it cannot go 
to the entrepreneur nor to the laborer. The mill and 
its contents earn for their operator nothing but simple 
interest on the money they have cost. Paying the 
laborers discharges the first claim on the product, and 
there then remains only enough of the product to pay 
the remaining claim, that of capital. 

The question still remains to be answered, how the 

146 



THE LAW OF INTEREST 147 

capitalist, if he is a different person from the entre- 
preneur, or operator of the mill, can make this func- 
tionary pay over to him all that he has in his hands 
after paying the wages of labor. 

The Importance of the Residuum. — The above 
reasoning does not satisfactorily show what influence 
the capitalist can use to make the entrepreneur pay 
over to him the entire amount of the residuum. It 
shows that after paying wages the entrepreneur will 
have a certain amount left, but it is not thus far clear 
how the capitalist can get it from him. The fact that 
the laborers get only the amount represented by 
ABDE and that the whole amount is ACDE does, 
however, at least show that the entrepreneur has the 
amount BCD left in his hands, and that he is able to 
pay this amount to the capitalist if by any appeal to 
competition the capitalist is able to make him do it. 

Interest not determined Residually. — The fact is 
that the interest on capital is fixed exactly as are the 
wages of labor. 

We will let another figure represent the entire prod- 
uct of the same amount of labor and the same amount 
of capital that were represented in the former case. 
We will assume that there is at the outset a complete 
force of laborers, and that no men are added to it or 
taken from it; but we will gradually introduce units 
of capital instead of units of labor as in the former 
case. The amount of capital is now represented by 
the Ym.Q A'W and the product of the first unit of it 
by the line A'C\ The product of the successive units 
declines along the curve CD'. The final unit of cap- 
ital then brings into existence the amount of wealth 
represenjbed by E'D'. As every other unit now pro- 
duces the same amount, the capital as a whole creates 



148 



ESSENTIALS OF ECONOMIC THEORY 




the quantity represented by A'B'D'E' and every 
unit of it makes its own separate contribution to that 

amount. In this 
^ we have simply 

appHed to capital 
and its earnings 
the principle we 
formerly applied 
to labor and its 
earnings. 

General Form of 
the Law of Final 
Productivity. — 
This principle is 
the law of final 
productivity, one of those universal principles which 
govern economic life in all its stages of evolution. 
Either one of the two agents of industry, used in in- 
creasing quantities in connection with a fixed amount 
of the other agent, is subject to a law of diminishing 
returns. The final unit of the increasing agent pro- 
duces less than did the earlier units in the series. 
This does not mean that at any one time one unit 
produces less than another, for at any one time all are 
equally productive. It means that the tenth unit pro- 
duces less than the ninth did when there were only 
nine in use, and that the ninth unit formerly pro- 
duced less than the eighth did in that still earlier 
stage of the process in which there were only eight in 
use, etc. If the productive wealth of the United 
States were only five hundred dollars per capita in- 
stead of more than twice that amount, interest would 
be higher than it is, because the productive power of 
every dollar's worth of capital would be more than 



THE LAW OF INTEREST 149 

the productive power of each dollar's worth is now; 
and, on the other hand, if we continue to pile up for- 
tunes, great and small, till there are in the country 
two thousand dollars for every man, woman, and 
child of the population, interest will fall, because the 
productive power of a dollar's worth will become less 
than it now is. 

How Competition fixes Interest. — We can now see 
how it is that the capitalist can make the entrepreneur 
pay over to him the amount left in his hands after 
paying wages. Every unit of capital that any one 
offers for hire has a productive power. It can call 
into existence a certain amount of goods. The offer 
of it to any entrepreneur is virtually an offer of a fresh 
supply of the kinds of goods which he is making for 
sale. Loaning ten thousand dollars to a woolen 
manufacturer is really selling him the amount of cloth 
that ten thousand dollars put into his equipment will 
bring into existence. Loaning a hundred thousand 
dollars to the manufacturer of steel, so as to enable 
him in some way to perfect his equipment, is virtually 
selling him the number of additional tons of steel, 
ingots, or rails that he can make by virtue of this 
accession to his plant. 

The Significance of Free Competition. — Now, the 
tender of capital may be made to any entrepreneur 
in a particular industry, and the existence of free 
competition between these entrepreneurs implies 
that a lender of capital can get from one or another 
of them the whole value of the product that this 
capital is able to create. A unit of capital in the 
steel business can produce n tons of steel in a year, 
and if one employer will not pay the price of n tons 
for the loan of it, another will. This, indeed, implies 



150 ESSENTIALS OF ECONOMIC THEORY 

an absolutely free competition; but that is the con- 
dition of the problem we have first to solve. When 
we know what ideally active competition will do, we 
can measure the effects of the obstructions that, in 
practice, competition actually encounters. 

Competition for Capital among Different Industries. 
— The capitalist can invoke the aid of competition 
outside of the limits of one particular business. He 
may offer his loan to steel makers, to woolen manu- 
facturers, cotton spinners, silk weavers, shoemakers, 
etc. Within each one of these industries perfect 
competition between the different employers will 
give him the value of the product which, in that busi- 
ness, his capital is able to create. If, however, what 
in this way he offers to men in one occupation is worth 
more than what he offers to men in another line, — if 
capital is worth more to steel makers than it is to 
cotton spinners, — he will find a market for his capital 
in the former industry; and this process of seeking 
out the employment in which capital is the more 
productive and there bestowing the loans of capital, 
will go on until every such local excess of productive 
power is removed and capital can produce as much 
wealth in one business as it can in another. Every- 
where capital will then be both producing and re- 
ceiving the same amount, and general interest will 
everywhere be determined by the final productivity 
principle acting all through the business world. 

When Interest as Directly Determined equals Interest 
as Residually Measured. — The area BCD of the first 
figure measures what the entrepreneur has left after 
paying wages. This amount and no more he can pay 
as interest, and he will pay it if he has to. The area 
A'B'D'E' of the second figure represents what he 



THE LAW OF INTEREST 151 

must pay as interest; and we can now see that, if 
competition is perfectly free, this amount equals the 
amount BCD of the first figure. If, after paying 
wages, there is any more left in the entrepreneur's 
hands than competition compels him to pay out as 
interest, he is realizing a net profit; he is selling his 
goods for more than they cost him, and this, as we 
saw at the outset, is a condition that under perfect 
competition cannot continue. The natural price of 
goods is the cost price. If the market price of any- 
thing is in excess of cost, entrepreneurs receive a 
profit, and in order to do more business and make a 
larger aggregate of such profit they bring new labor 
and capital into their industry. The increased output 
lowers prices, and the excess of gain is thus taken from 
the entrepreneur. If BCD is smaller than A'B'D'E' , 
the entrepreneur incurs a loss and will curtail his 
business and let some labor and capital go where 
they can produce more. 

Taking this remainder of income from the entre- 
preneur by means of an addition to the output of 
goods and a reduction of the price of them does not 
annihilate the income, but bestows it on other re- 
cipients ; for the reduction in price which destroys an 
employer's profit can come only in a way that benefits 
consumers. It means that enlarged production of 
which we have just spoken, which scatters more goods 
throughout the community and insures an addition 
to the real incomes of both laborers and permanent 
investors. 

Effect of Perfect Mobility of Labor and Capital. — 
Perfect mobility of labor and capital insures that the 
residuum in the entrepreneur's hands after wages are 
paid shall all be made over to the capitalist. We 



152 ESSENTIALS OF ECONOMIC THEORY 

encounter here again the static law that, with com- 
petition working without let or hindrance, the entre- 
preneur as such can keep nothing for himself ; though 
if he is also a worker he will get wages, and if he is 
also a capitalist he will get interest. His business 
will pay wages on all kinds of labor, including that 
of management, and interest on all capital, includ- 
ing his own. A net gain above all this it will not 
afford, and whatever the entrepreneur has left after 
paying wages he will have to use in paying interest, 
and vice versa. Laborers and owners of capital have, 
as it were, to take each others' leavings. Such is the 
situation in an ideally static condition, though we 
shall see how it is changed in actual and progressive 
society. 

The area BCD of the first figure is, under static 
conditions, exactly equal to the area A'B'D'E' of 
the second figure, because ACDE represents the whole 
product, BCD in the first figure represents all that 
is left of it after wages, measured by ABDE, are paid ; 
and we know by evidence both theoretical and prac- 
tical that the capitalist, whose share is directly ex- 
pressed by A'B'D'E' of the second figure, can claim 
and get the whole of this amount. 

Wages as a Residuum. — It is clear that the same 
reasoning applies to wages. In the second figure they 
are represented as a residuum. The area B'C'D' 
represents what the entrepreneur has left after pay- 
ing interest, and nobody can get this amount but the 
wage earner. The reason, however, why the wage 
earner can get it is that free competition will give him 
the amount ABDE of the first figure, and this, under 
perfectly static conditions, must equal B'C'D' of 
the second. Under perfect competition the entre- 



THE LAW OF INTEREST 153 

preneur cannot have any of the amount B'C'D' left 
in his hands after meeting the claims that the wage 
earner makes on him. On the other hand, he must 
have enough left to pay interest, since otherwise he 
would be incurring a loss, and that could not fail to 
force him and others who are in the same situation 
to contract their operations or go out of business. If 
the output of goods is reduced, either by the retire- 
ment of some employers or the curtailment of product 
by all, the price of what continues to be sold will be 
raised to the point at which wages and interest can be 
paid. 

Wages and Interest both adjusted at Social Margins 
of Production. — It is to be noted that wages and 
interest are fixed at the social margin of production, 
which means that they equal what labor and capital 
respectively can produce by adding themselves to the 
forces already at work in the general field of employ- 
ment. In making the supposition that, owing to 
some disturbing fact, a particular entrepreneur has 
not enough after paying wages to pay interest, we as- 
sume that the rate of interest is fixed, in this way, in 
the general field and not merely in his establishment. 

If B'C'D' were larger than ABDE, the entrepreneur 
would be selling goods for more than cost and realiz- 
ing a net profit, which he cannot do in a static state ; 
but a pure profit is not only possible but actual in a 
dynamic state. 

In actual business total returns represented by 
ACDE amount to more than the sum represented by 
ABDE (wages) plus A'B'D'E' (interest). There are 
conditions that in practical life are continually bring- 
ing this to pass in different lines of business, though 
not in all of them at once. The real world is dynamic 



154 ESSENTIALS OF ECONOMIC THEORY 

and therefore the true net profit, or the share of the 
entrepreneur in the strict sense of the term, is a positive 
quantity. This income is always determined residu- 
ally. It is a remainder and nothing else. It is what 
is left when wages and interest are paid out of the 
general product. To the entrepreneur comes the 
price of the products that an industry creates. Out 
of this he pays wages and interest, and very often 
he has something remaining. There is no way of 
determining this profit except as a remainder. The 
return from the sale of the product is a positive 
amount fixed by the final utility principle. Wages 
and interest are positive amounts, and each of them 
is fixed by the final productivity principle. The 
difference between the first amount and the sum of the 
two others is profit, and it is never determined in any 
other way than by subtracting outgoes from a gross 

, income. It is the only share in distribution that is 
so determined. Entrepreneur's profits and residual 

./income are synonymous terms. In the static state 
no such residual income exists, but from a dynamic 
society it is never absent. Y^y&cy entrepreneur makes 
some profits or losses, and in society as a whole the 
profits greatly predominate. 

Summary of Facts concerning a Static Adjustment 
of Wages. — We know then that in any industry 
wages and interest absorb the whole product, because 
any deviation from that rule in a particular group is 
corrected in the way above mentioned. Moreover, 
general wages and interest, as determined by the law 
of final productivity, must equal those incomes when 
they are determined residually. The area of the 
rectangular portion of one of the foregoing figures 
must equal the area of the three-sided part of the 



THE LAW OF INTEEEST 155 

other. The question arises why all entrepreneurs 
might not get a uniform profit at once. This would 
not lure any labor or capital from one group or sub- 
group to another. If, after paying wages and interest 
at market rates, the entrepreneurs' in each industry 
have anything left, the entire labor and capital are 
producing more than they get and there is an induce- 
ment to managers and capitalists to withdraw from 
their present employers and become entrepreneurs 
on their own account. Such an entrepreneur entering 
the field, drawing marginal labor and capital away 
from the entrepreneurs who are already there and 
combining them in a new establishment, can make 
them produce more than he will have to pay them 
and pocket the difference. If such a condition were 
realized, there would be a gain in starting new enter- 
prises, since luring away marginal agents and com- 
bining them in new establishments would always be 
profitable. When we introduce into the problem 
dynamic elements we shall see that centralization, 
which, makes shops larger instead of smaller, makes 
industries more productive, and that what happens 
when net profits appear is more often the enlarging 
of one establishment than the creation of new ones. 
Entrepreneurs in the large establishments can afford 
to resist the effort made by others to lure away any 
of the labor or capital which they are employing, and 
they will do this for the sake of retaining their profits. 
They can do it by bidding against each other, in case 
any of them are making additions to their mills or 
shops, and also by bidding against any new employers 
who may appear. Perfect competition requires that' 
this bidding for labor and capital shall continue up to 
the profit-annihilating point.. Here, as elsewhere in 



156 ESSENTIALS OF ECONOMIC THEORY 

the purely static part of the discussion, we have to 
make assumptions that are rigorously theoretical 
and put out of view in a remorseless way disturbing 
elements which appear in real life. The static state 
requires that all entrepreneurs who survive the sharp 
tests of competition should have equally productive 
establishments, which means that they should all be 
able to get the same amount of product from a given 
amount of labor and capital. The actual fact is that 
differences of productive power still survive. There 
are some small establishments which, within the little 
spheres in which they act, are as productive as large 
ones; but there are also some which are struggling 
hopelessly against large rivals in the general market 
and are destined erelong to give up the contest. In 
other words, the centralizing and leveling effects of 
competition are approximated but never completely 
realized in actual life. 

A fact that it is well to note is that the test of final 
productivity is inaccurately made when unduly large 
amounts of labor and capital are made the basis of 
the measurement. Take away, for instance, a quarter 
of the working force, estimate the reduction of the 
product which this withdrawal occasions, and attribute 
this loss entirely to the labor which has been taken 
away, and you estimate it too highly. With so large 
a section of the labor withdrawn the capital would 
work at a disadvantage, and a part of the reduction 
of the product would be due to this fact. If we should 
take away all the labor, the capital would be com- 
pletely paralyzed, and the product would become nil. 
It would obviously be inaccurate to say that the whole 
product is attributable to the labor, on the ground 
that withdrawing the labor annihilates it all. With 



THE LAW OP INTEREST 157 

any large part of the labor treated as a single unit, the 
loss of product occasioned by a withdrawal of such a 
unit is more than can be accurately imputed to it as 
its specific product. The smaller the increments or 
units are made, the less important is this element of 
inaccuracy, and it becomes a wholly negligible quantity 
when they become very small. A study of the forms 
of the productivity curves will show that if we take 
as the increment of labor used in making the test only 
a tenth of the whole force, we exaggerate the product 
imputable to it by a very minute fraction, say by 
less than a one-hundredth part; and if we take a 
hundredth of the labor as a final unit, we exaggerate 
the product that is solely attributable to it by an 
amount so minute that it is of no consequence in 
practice or in any theory that tries to be applicable 
to practice. 

A question may be raised as to whether we are 
correct in saying that the entrepreneur's profit is 
residual, in view of the fact that the entire product of 
a business is at the mercy of the management, so that 
a bad manager may reduce it or a good one may 
increase it. It may be further claimed that that 
part of the management of a business which consists 
in making the most far-reaching decisions cannot 
safely be intrusted to a salaried superintendent or 
other paid official and must get its returns, if at all, 
in the form of profits. Even in this case the gains are 
secured by making the gross return, which is the 
minuend in the case, large, leaving the two subtra- 
hends, wages and interest, unchanged, and thus 
creating a remainder or residuum. We shall later 
see to what extent entrepreneurs do in fact create the 
profits that come to them. 



/ 



158 ESSENTIALS OF ECONOMIC THEORY 

The complete static conception of society requires 
that no entrepreneur should be left in the field who 
cannot continue indefinitely to hold his own against 
the competition of his rivals, and this requires essen- 
tial equality of productive power on the part of all of 
them. It is not necessary, however, that all should 
operate upon an equal scale of magnitude, for an 
interesting feature of modern life is the need of many 
small productive establishments that cater to local 
demands and to wants which, without being local, 
call for only a few articles of a kind. Repairs, small 
orders, and peculiar orders are executed more cheaply 
in small establishments, and they survive under the 
very rule of essential equality of productive power 
which static conditions require. For catering to the 
general market and producing staple goods the large 
establishment has a decisive advantage, and this 
insures the centralization which is the marked feature 
of recent industrial life. 



CHAPTER X 

EENT 

The Term "Rent " as Historically Used. — The word 
rent has a striking history. The science of pohti- 
cal economy first took shape in a country in which 
direct employers of labor were not, as a rule, the own- 
ers of much land. Farmers, merchants, and many 
manufacturers hired land and furnished only the 
auxiliary capital which was necessary in order to 
utilize it. In a practical way the earnings of land 
were thus separated from those of capital in other 
forms, since they went to a different class of persons ; 
and in the thought of the people the charges made for 
the use of mere ground came to constitute a unique 
kind of income. If, during the last century, the land 
in England had been a highly mercantile commodity, 
and if it had been the common practice of entrepreneurs 
not to hire it but to buy and own it, as they bought and 
owned all other industrial instruments, there is little 
probability that land would have been considered, 
either in practical thought or in science, as a thing 
to be as broadly distinguished as it has been from 
all other capital goods. A business man would have 
measured his permanent fund of capital in pounds 
sterling and would have included in the amount what- 
ever he had invested in land. As in America any 
representation of the capital of a corporation includes 
the sums invested in every productive way, and this 
includes the value of all land that the company holds, 

159 



160 ESSENTIALS OF ECONOMIC THEORY 

SO in England, under a similar system of conducting 
business, any statement of the amount of a particular 
business capital would have included the whole of 
the productive wealth embarked in the enterprise; 
and in any statement of the forms of it there would 
have appeared, besides a list of all tools, buildings, 
unfinished goods, and the like, a schedule of the 
prices of land that the company owned and used. In 
"putting capital into his business" a man might buy 
land, in "withdrawing his capital" he might sell it; 
and the land in the interim would be the obvious em- 
bodiment of this part of his fund. The fact, then, 
that land was owned by one class of persons and let 
to another for hire, and that the lessees were the 
entrepreneurs or users of it, caused practical thought 
and speech to put land in a class by itself. 

The Origin of the Theory of Rent. — Scientific 
thought powerfully strengthened this tendency. At 
a very early date a formula was attained for measur- 
ing the rent of land, while no satisfactory formula 
was, then or for a long time afterward, discovered for 
measuring the amount of interest. Men contented 
themselves with saying that the rate of interest de- 
pends on demand and supply. In the case of the 
rent of land the same thing might have been said, but 
here such a statement was not mentally satisfying, 
and investigators tried to ascertain why demand and 
supply so act as to fix the income that land yields at 
a certain definable amount. 

The Traditional Formula for Rent. — The formula 
which has long been accepted as measuring the rent 
of a piece of land, though it bears the name of Ricardo, 
grew into shape under the hands of several earlier 
writers. In its best form of statement this principle 



RENT 161 

asserts that ''the rent of a piece of land is the prod- 
uct that can be realized by applying labor and capital 
to it; minus the product that can be realized by ap- 
plying the sanje amount of labor and capital to land 
of the poorest grade that is in cultivation at all." The 
quantity of the poorest land must be left indefinite, 
and all that the given amount of labor and capital 
can economically utilize must be left at their disposal. 
It would not do to say that the rent of an acre of 
good land equals its product less that of an acre of 
the poorest land in cultivation tilled with the same 
expenditure of labor and capital. If we should 
select a bit of wheat land in England tilled at a large 
outlay in the way of work, fertilizers, drains, etc., 
and try the experiment of putting the same amount of 
labor and capital on a piece of equal size in the remot- 
est part of Canada, we should find that, so far from 
securing wheat enough to pay the bills that we should 
incur in the way of wages and interest, we should not 
have enough to help us greatly in the defraying of 
these costs, and the cultivation of this piece of land 
would be a losing venture. Instead of being no-rent 
land, yielding merely wages and interest for the labor 
and capital used in connection with it, it would be 
minus-rent land, deducting something from the earn- 
ings which the agents combined with it might else- 
where secure. In order to utilize such land at all, one 
must till it in what is termed an extensive rather than 
an intensive way, putting a small amount rather than 
a large amount of work and expenditure on it. By 
tilling ten acres of a remote and sterile farm with as 
much labor and other outlay as a very good acre of 
land in "England receives, one can perhaps get enough 
to pay the required wages and interest. In general 



162 ESSENTIALS OF ECONOMIC THEORY 

no-rent land is commonly utilized in an extensive 
way and very good land in an intensive way ; and in 
stating the old formula for rent we need to be careful 
to make it mean that the rent of the good piece is its 
total product less the product that can be had by 
taking from the good piece the labor and capital it 
now absorbs and setting them at work on a piece of 
the poorest land which is enough larger than the 
good one to enable us to secure a crop which will be 
worth just the amount of wages and interest we must 
pay. The larger size of the poor piece of land is an 
essential condition. 

Real Significance of Rent Formula. — It will be seen 
that this formula amounts to saying that the rent of 
land is what the land itself adds to the marginal prod- 
uct of labor and capital. Put a certain amount of 
labor and capital on a piece of land of good quality, 
and you get a certain amount of product. Withdraw 
the land from the combination, and you force the 
labor and capital to become marginal increments of 
these agents. They must go elsewhere and get what 
they can. One alternative that is open to them is 
that of seeking out land of a grade so poor that it 
has not been previously utilized and doing what they 
can to get a product out of it. Whatever they can 
make such land yield is, in an economic sense, wholly 
their own product. There is an indefinite quantity 
of this kind of land to be had, and wherever labor and 
capital utilize any part of it, they can have all that 
they produce. Now if we subtract what they there 
create from what was created when they were work- 
ing on the good land, we have the rent of that land. 

Rent as a Product Imputable to Land. — The differ- 
ence between what the labor and capital produce at 



RENT 163 

the margin of cultivation of land and what they can 
produce on good land, or land that lies within the 
margin, is clearly attributable to the qualities of the 
land itself. Given X units of labor and Y units of 
capital, combine with them no land except such as is 
too poor to have been previously utilized, and you get 
a certain product. It is the product of the labor 
and capital using something which is free to any one. 
Now put a piece of good land into the combination; 
to the X units of labor and Y units of capital add a 
piece of productive land and see what you can create. 
We do this by taking these units of labor and capital 
away from the worthless marginal land and setting 
them to tilling that which is of the better quality. 
The product is of course larger than they got before, 
and the difference measures what the land itself adds 
to the output of the other agents in the combination. 
The true conception of rent is that of the specific 
addition which land makes to the product of other 
agents used in connection with it. There are various 
ways of Pleasuring this addition, but the method just 
used will at least show that the presence of the good 
land is the cause of the excess of product which given 
amounts of labor and capital secure over what they 
could create on land of the poorest quality. 

Rent as a Differential Product. — In the early 
statements of the rent law it was not said that the 
rent of a piece of land is the product specifically 
attributable to it. If it had been, the chances are 
large that a much broader and more scientific use 
of the rent formula would have resulted. The law of 
rent, as it was actually stated, made it consist of 
a differential amount. It was what a given amount 
of labor and capital would produce under one set of 



164 ESSENTIALS OF ECONOMIC THEORY 

conditions minus what they would produce under 
another. Since it is the presence or the absence 
of the productive land which makes the only dif- 
ference between the two conditions, rent, even as 
it is thus defined, is really the amount of product 
specifically attributable to the land. It is what 
is created when the land is used in excess of what 
would be created if it were not used and if the co- 
operating agents did the best they could without it. 
We may use, as the most general formula for the 
rent of land, the contribution which land itself 
makes to the product of social industry. 

If we use the same method in measuring the rent 
of land which we used in measuring the wages of 
labor and the returns of capital, we shall represent 
the rent of a given piece of land as the sum of a series 
of differential amounts. In the accompanying figure 
the vertical belts bounded by lines rising from the 
letters A, B, C, etc., represent the products realized 
by applying successive increments of labor and 
capital to a given piece of land; and the horizontal 
lines running toward the left from A', B', C, etc., 
separate the wages and interest from the amounts 
that are successively added to rent. When one 
composite unit of labor and capital is working, its 
product and its pay is measured by the belt between 
the line A A' and the line NN'. A second com- 
posite unit produces the amount represented by 
the area between AA' and BB' , and that is the 
amount which each unit separately considered will 
produce and get as its pay. This leaves the area 
between the horizontal line running from B' and 
the section of the descending curve as the rent of 
the land. A third unit of labor and capital produces 



RENT 



165 



what is represented by the area between BB' and 
CC , and this becomes the standard of pay for all 
units, leaving the enlarged area above the hori- 
zontal line at C as rent. In the end there are ten 
units of labor and capital. Their total earnings 
are expressed by the area of the rectangle below 
the horizontal line running from /', and the sum of 
all the areas above that line is rent. 

The Intensive Margin ^, 
of Cultivation. — The 
extensive margin of 
cultivation is the land 
that is adjacent to an 
imaginary boundary 
line separating the 
grades of land that 
are good enough to 
be used from those 
that are too poor to 
be used. There is, 
however, what may be called the intensive margin 
of cultivation. A given bit of land is said to be 
cultivated more and more intensively when more 
and more labor and capital are used on it. Land 
is subject to what is called the law of diminishing 
returns. 

Law of Diminishing Returns. — The more labor 
and capital you employ on a given piece of land, 
the less you will get as a product for each unit of 
these agents. What the last unit of labor adds to 
the antecedent output is less than was added by 
any of the other units, and the same is true of the 
last unit of capital. As we continue the process 
of enlarging the working force and adding to the 



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3' 






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r>t 








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^h ^, 















^^ H' .' .. 




= 














=: 


J 


N y 


\ E 


3 C 


: I 


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I f 


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3 h 


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166 ESSENTIALS OF ECONOMIC THEORY 

working appliances, we reach a point at which it 
is better to cease putting new men with their equip- 
ment at work on this piece of land and to set them 
working on a bit of land so poor that it was not 
formerly utilized at all. We may assume here that 
what a man needs, in the way of auxiliary capital, 
goes with him, whether he joins a force that is work- 
ing on good land or migrates to a less productive 
region. He will go if it will pay him to do it. In 
this way we make a sort of dual unit of labor and 
capital and apply a series of such units to land. 

Ground Capital and Auxiliary Capital Distin- 
guished. — Land itself is a component part of the 
permanent fund of productive wealth to which we 
have given the generic name capital. It differs 
from other capital goods in that it does not wear 
out and require renewing. Working appliances, 
however, as they wear out and are replaced, con- 
stitute a permanent fund of auxiliary capital, and 
we shall apply this term to the abiding stock of 
such instruments except in connections in which 
the adjective is not needed, because it is clear that 
the land, or ground capital, cannot be referred to. 
In dynamic studies the distinction between land 
and auxiliary capital becomes very important. 

How the Intensive Margin locates the Extensive 
One. — The labor and the auxiliary capital that 
betake themselves to new land of the inferior quality 
represent an overflow from the better land. As 
long as men can do as well by staying where they 
are as they can by migrating to new regions, where 
inferior lands are to be had, they will stay; but 
when they incur a loss by staying, they move. What 
a laborer can create by securing the use of an equip- 



RENT 167 

merit and adding himself to the force that is at 
work on some good farm, can be approximately 
estimated; and if there is somewhere a piece of 
land not thus far used to which he can remove, 
and if, by going to work upon it, he can create any 
more than he created while working on the older 
farm and taking his products as his pay, he will till 
that poor piece. But neither he nor any one else 
will till a piece that is still less productive. If any 
one were to set himself working on land of still poorer 
quality, he would lose and not gain by the change, 
since there he would produce even less than he can 
when he is the last man set working on the good 
piece. 

To what Extent the Movement of Labor and that of 
Capital are Interdependent. — The early statements 
of the law of rent did not usually define the intensive 
margin of cultivation in connection with labor and 
capital separately, but spoke of these two agents 
as employed together upon land in quantities in- 
creasing up to a limit beyond which both labor and 
capital would best be employed elsewhere. The 
supposition that labor and capital go thus together 
from one grade of land to another is only approx- 
imately accurate. If we consider one man and 
five hundred dollars' worth of productive wealth 
as a dual unit of labor and capital, and add such 
units, one after another, to the forces at work on 
a tract of good land, we shall reach a point at which 
it will not be profitable to increase the amount of 
one of the agents, while it will still be profitable to 
increase the amount of the other. It will perhaps 
not pay to use any more capital, but it may still 
pay to add to the number of workers. On land 



168 ESSENTIALS OF ECONOMIC THEORY 

that is tilled more and more intensively, labor and 
capital are not tied together in fixed proportions 
in such a way that, when there is more of one of 
them used, there is proportionately more of the 
other. Moreover, when a unit of one of them aban- 
dons a piece of land and goes elsewhere, there is no 
probability that exactly one unit of the other will 
do the same. There is, indeed, no such thing as 
a dual unit of labor and capital that can be thought 
of as moving to and fro among different employ- 
ments till it finds the point at which, as a dual unit, 
it can create its largest product. These two agents 
so locate ^themselves that a final unit of each one, 
separately considered, produces as much where it is 
as it can produce anywhere else. 

It is, however, to be noted that the amount of 
labor that can profitably be employed on a piece 
of land grows larger the more capital there is em- 
ployed in connection with it. An acre of land and 
a thousand dollars' worth of auxiliary funds can 
enable more men to get good returns than can an 
acre combined with a fund of five hundred dollars. 
Conversely, the more men there are working on the 
area, the more auxiliary capital it pays to use there. 
If there are five men working on a small field it may 
be that a thousand dollars may be well invested 
in aiding them, while with only one man it would 
not pay to use so large an amount. The capital 
and the labor, as it were, attract each other. Ad- 
ditional capital attracts further labor, and vice 
versa, till a condition is reached in which neither 
of them can so well be used on that particular piece 
of land as it can elsewhere. Each one has then 
been used on this area up to its own intensive-mar- 



RENT 169 

ginal limit. So also when one of these agents betakes 
itself to marginal land, it attracts the other agent 
thither. When there are ten men on the poorest 
piece of land in a locality, it is possible to make a 
considerable amount of capital at that point pay 
the return generally prevailing, whereas only a small 
amount would pay it if there were only five men 
working. With a thousand dollars invested on 
that land more laborers will be lured thither by the 
prospect of fair returns than would be lured thither 
if there were only half as much capital. The general 
apportionment of both agents tends to be such 
that a unit of either is as well off on one piece of 
land as on another, and each is as well off at the 
extensive margin of cultivation of land as it is on 
the intensive margin. 

Labor and Capital combined in Varying Amounts. 
— The amount of capital that is combined with 
a unit of labor is not often the same on good land 
as it is on poor. The proportions in which labor 
and capital will be combined on the marginal field 
will be almost certain to vary from those in which 
they were combined in the better field from which 
they came. It may be that they leave industries 
in which an. average man uses an equipment worth 
a thousand dollars. When they reach the margin 
of cultivation, capital may be so scarce that the 
thousand dollars will not stay in the hands of the 
one man but will divide itself among several. 

The General Law of the Extension of the Margin of 
Cultivation. — ■ Sometimes, when labor moves to 
new land that is now at the margin, it takes its new 
equipment with it; but such land is not always 
tilled by independent settlers. Employing farmers 



170 ESSENTIALS OF ECONOMIC THEORY 

may set men working on it and pay them all that 
they produce; and the farmers may furnish the 
men with capital of their own or borrow capital 
for them to use. In either case a static condition 
requires the equalizing of the productivity of labor 
at the intensive margin with that of labor at the 
extensive margin; and it requires a similar leveling 
of the productivity of capital at the two margins. 
When this leveling has taken place in both cases, 
the all-around marginal product of labor fixes the 
rate of wages, and that of capital fixes the rate of 
interest. What a man creates on the good land 
and with the adequate capital, or on poor land 
with proportionate capital, — in any occupation on 
land of either grade, — determines the pay that 
he and other men can get. It constitutes in itself 
the wages of labor. In so far as the overflow of 
labor and capital into any one limited region of 
marginal land is concerned, the full statement is 
this: that the margin of utilization of land will 
be extended to the point at which a unit of labor, 
using as much of the marginal land as it is economical 
to use, and such amount of auxiliary capital as is 
economical to combine with this unit of labor and the 
land it occupies, will create a product equal to the 
wages of the unit of labor as they are determined by 
the product it created when it was employed on the 
good land and in connection with the full equipment 
of auxiliary capital. 

The Rent of a Fund of Capital. — We saw that one 
unit of labor employed in connection with a given 
amount of capital produces more than does a second ; 
that the second produces more than the third ; and 
that, if we continue to supply units one at a time, 



RENT 171 

the last unit in the series produces the least of all. 
Wages are fixed by the amount that one unit of 
labor produces when the working force is complete, 
and that is what is contributed to the general prod- 
uct by the unit of labor which comes last in the 
imaginary series by which the force is built up. 
Owing to the more favorable conditions under which, 
in their time, the earlier units worked, they were 
able to produce surpluses above the amount pro- 
duced by the last one. When they entered the 
field they were supplied with excessive amounts 
of capital. The first one had the whole fund co- 
operating with it, till it had to share it with the 
second ; and after that each had a, half of it till they 
had to share evenly with a third, etc. We have 
seen that all the surpluses appearing in connec- 
tion with the earlier units are attributable in real- 
ity to capital. The area BCD (page 139) represents 
the amount by which the presence of an excess of 
capital increases the products attributable to the 
earlier units of labor. It represents the sum of all 
the differences between the products of the earlier 
units and the product of that final one which in the 
end sets the standard of productivity of labor. It 
might be called the rent of the fund of capital. It 
is composed of a sum of differences exactly like 
those which constitute the rent of a piece of land. 
The Rent of a Permanent Force of Labor. — In the 
figure on page 148, the working force was supposed 
to be fixed in amount, the capital increasing by 
increments, or as some earlier economists would 
have said, by "doses" along the line A'E'. The 
last unit of capital produces the amount D'W, and 
all the capital produces A'B'D'W , while products 



172 ESSENTIALS OF ECONOMIC THEORY 

of' the earlier units of capital, as they come suc- 
cessively into the field and are used by an exces- 
sively large labor force, are represented by the 
area B'C'D\ Here this area represents what may 
be called the rent of the force of labor, since it is 
a sum of surpluses that, again, are entirely akin to 
those that constitute the rent of a piece of land. 
A Question of Nomenclature. — It may be an open 
question, as a matter of mere nomenclature, whether 
these surpluses which are thus traceable to a per- 
manent fund of capital, on the one hand, and to 
a permanent force of labor, on the other, can with 
advantage be called rents. In this treatise we do 
not think it best to employ that nomenclature. 
What is not uncertain is that these gains are meas- 
urable by the same formula that measures the rent 
of a piece of land. If the essential thing about 
rent were that it is a material product and con- 
sists of a sum of differential quantities, these incomes 
certainly would be rents. Popular thought, how- 
ever, attaches another meaning to this term, and 
we therefore limit ourselves to saying that these 
differential incomes or surpluses may be determined 
in amount by the principle of rent. They can be 
described and measured exactly as the Ricardians 
described the income of landlords.^ 

^ The term rent has even been applied to surpluses of a 
psychological kind. Certain gains that men get consist purely 
in pleasures or in reduced pains or sacrifices, and a few writers 
have applied to such subjective gains the term rent. If a 
man buys a barrel of flour for five dollars and gets out -of it 
a service that is a hundred times as great as he could get 
from some other article which he buys for the same amount, 
this surplus of pleasure may be called, by a figure of speech, 
" consumers' rent " ; and if the essence of rent were the fact 



RENT 173 

that it can be made to take the form of a surplus or difference, 
the name would be well chosen, though there is danger that 
by this use of the term science may divorce itself from practical 
thought and life. If we take all the barrels of flour that a 
man uses in ten years, there is one which is marginal, because 
it is worth to the man only enough to offset the sacrifice he 
incurs in getting it. All the others are worth more. We 
can arrange them in a scale in the order of their importance, 
the most necessary one coming first and the least important 
one last; and we can compare the service which each one 
renders with that rendered by the last, and measure the sur- 
plus of good which each one does to the user. There is here 
in operation a law of diminishing subjective returns. Early 
units consumed afford more pleasure than do later ones. 
There results a series of surplus gains, and the sum of all these 
surpluses makes a total of net benefit, — is a gain that is not 
offset by a compensatory sacrifice. The last barrel of flour 
on the list is worth just what it costs, and all the others are 
worth more. They give the consumer a surplus of satis- 
faction for which he pays nothing. The sum of the excesses 
of service rendered by all the earlier barrels constitutes what 
has been called the consumers' rent, realized in this case from 
the entire supply of flour used by the man. In the manner 
in which it is conceived and measured this gain has a kinship 
to genuine rent. 

This surplus is an effect on a man himself. It is not any- 
thing outward or tangible. It exists only in the man's sen- 
sations, and is as far as possible from being a concrete income 
in material form traceable to some particular agent. It can 
be measured and described in ways that are quite akin to 
the manner in which the product of land is measured and 
described. Each consists of the sum of a series of surpluses 
or differential amounts, and each, moreover, represents a gain 
which is not offset by any corresponding subjective cost. 
The rent of land must be paid by an entrepreneur and is a 
cost in the same sense in which wages and interest are so; 
but the owner of the land did not create it by personal effort 
or sacrifice. 

Analogies between the product of land, or rent, and the 
special gains of consumers from the more important parts 
of their consumption do exist, but they are overbalanced 
by essential differences; and it is better to use the term rent 
only in describing the specific contribution to the material prod- 
uct of industry which a concrete and material agent makes. 



CHAPTER XI 

LAND AND ARTIFICIAL INSTRUMENTS 

One may hire many things besides land and pay 
what is commonly called rent for them. No one 
would think of calling by any other term the amount 
paid for the use of a building, a room in a building, 
or the furniture in the room. All these things 
yield rent to their owners; and if the intuitions 
which govern the common use of terms are to be 
trusted, the income derived from such things and 
that derived from land have some essential qualities 
in common. Every such income is paid for the use 
of some concrete instrument, and is measured, not 
by a percentage on the value of the instrument, 
but by a lump sum — a certain number of dollars 
per month or per year. 

The Mode of Calculating the Rent of Concrete In- 
struments. — Now the rent of such instruments 
of production, whether artificial or not, can be 
measured in exactly the same way in which the 
rent of land is measured. We saw that there are 
two margins of utilization of land, an extensive 
and an intensive one, and that the product of labor 
and capital at either of these margins may be used 
as a basis for computing the surpluses which con- 
stitute the rent of the land. The landlord gets 
from a good field what it produces minus what the 
labor and capital that are used on this field would 
produce if they were used on the poorest land in 

174 



LAND AND ARTIFICIAL INSTRUMENTS 175 

cultivation; or, what is the same thing, he gets 
from the field what it produces minus what this 
labor and capital would produce if they were set 
working somewhere on the intensive margin of 
cultivation. Take the men out of this field, add 
them in small detachments to the men who are 
already cultivating other fields, in order that such 
fields may be tilled a little more intensively, and 
measure the product which the laborers create 
when they are so placed. Withdraw also the capital 
from the field, add it, in small amounts, to the capital 
that is working elsewhere, and measure its specific 
product. The sum of these two specific products 
is the same amount that is arrived at by using the 
former standard. This labor and capital, formerly 
used on the good field, scattered as they now are 
among the users of other good land, will create the 
same amount that they would have created if they 
had been employed on the poorest land in cultiva- 
tion. This amount is, as it were, what they produce 
by their own unaided power; and whatever is pro- 
duced in excess of this amount when a good field 
comes to their assistance is the rent of that field, 
for it is the contribution which the field makes to 
the joint production. Total product of land, labor 
and auxiliary capital minus the product created by 
the labor and auxiliary capital when these agents 
are put in marginal positions equals the rent of 
the land. 

The Rent of an Instrument measured from the 
Intensive Margin. — We can measure the product 
of any instrument in this way. If it is a ship, it 
takes labor to sail it and requires a considerable 
amount of auxiliary capital. We must fill the 



176 ESSENTIALS OF ECONOMIC THEORY 

bunkers with coal, stock the steward's department 
with provisions, furnish and Ught the staterooms 
and the saloons, and provide cordage and a wide 
variety of other ship stores. All this labor and 
all this capital we could take out of the ship and use 
elsewhere. We could convert them into marginal 
labor and capital. We could divide them among 
the owners of other ships where they would be used 
in a way that would make these other ships some- 
what more efficient and cause each of them to earn 
a little more than it now earns. Whatever the la- 
bor and capital could, in this way, produce furnishes 
the basis for computing the rent of the ship. Sub- 
tract it from the total joint product of labor, capital, 
and ship, and you have what the vessel separately 
earns. 

The Mode of Testing the Productive Power of a 
Ship. — Put the labor and capital into the ship 
and set it doing its proper work of carrying freight 
and passengers, and you cause a certain product 
to be created. The steamship company gets an 
aggregate amount for the service it renders by 
means of the labor, the auxiliary capital, and the 
ship. A certain smaller amount would be realized 
if the labor and the auxiliary capital were taken 
out of the ship, distributed, and used in the way we 
have just described. The difference between the 
two amounts is the rent of the ship, or its particular 
contribution to the general product. This gives 
us a formula for computing the rent, not only of 
land, but of buildings, tools, machines, vehicles, 
and every other concrete instrument of production. 
The formula, indeed, is so general that it enables 
us to compute the earnings of any agent whatso- 



LAND AND ARTIFICIAL INSTRUMENTS 177 

ever. The rent of any such agent is what it adds to 
the marginal product of labor and capital used in 
connection with it. 

No-rent Instruments. — The majority of instru- 
ments that are in use add something to the marginal 
product of the labor and capital used in connection 
with them. Some add more and some add less, 
according to their several qualities. As a rule, any 
tool of trade produces most when it is new and less 
and less as it grows older. In the end it is discarded 
because it has so deteriorated that it no longer adds 
anything to the marginal product of the labor and 
capital that are used in connection with it. A 
wagon has become so rickety that it no longer pays 
to furnish a horse, a harness, and a driver for it. 
The capital and labor that these represent would 
earn as much if they were detached from the old 
vehicle and added to the equipment of some person 
who has a stock of good ones. The rent of this 
old wagon is nothing. As in the case of the poorest 
land in cultivation, it is a matter of indifTerence 
whether certain amounts of labor and capital are 
used in connection with it, or whether they are with- 
drawn and employed elsewhere. This poor vehicle, 
like the poor land, may be" used without positive 
loss; but if it is so used, nobody gets any income 
from it. It has no power to enter in a really pro- 
ductive way into combination with labor and capi- 
tal, for it cannot so combine with them as to add 
anjrthing to those marginal products which the 
labor and capital could create if they remained 
detached from it. 

The Universality of the Test of Rent. — This test, 
whether an instrument can or cannot add something 



178 ESSENTIALS OF ECONOMIC THEORY 

to the marginal product of labor and capital, may be 
universally used. It may be applied to everything 
that is made as an aid to labor. There are no-rent 
buildings, locomotives, cars, tracks, ships, wagons, 
furnaces, engines, boilers, and, in short, instruments 
of every description that figure in production. Com- 
bine any one of them with labor and capital and see 
what you get out of the combination ; then take the 
labor and capital away and see what they will pro- 
duce as marginal labor and capital ; and the difference 
between the two amounts, whatever it is, is the rent 
of the instrument. If the difference is nil, the instru- 
ment is at the point of being abandoned.^ 

True Capital rather than Capital Goods moved in 
Making such Tests of Productivity. — In applying these 
tests with scientific accuracy we should take away 
the true capital used in connection with a rent-paying 
instrument and use it as marginal capital elsewhere, 
rather than take away the particular concrete thing 
in which that capital is now embodied. In the case 
of the ship the accurate test is made, not by taking 
stores, etc., bodily out of it and putting them into other 
ships, but by letting the stores first earn what they 
can where they are, converting the earnings into 
money, and, when the stores are completely used up, 
spending the money to procure marginal additions 
to the outfit provided for the other ships. 

One Difference between Land and Artificial Capital 
Goods. — In the case of land a particular area is 

^ Whether such an instrument should or should not be 
called a capital good is a question of mere nomenclature; 
but in this treatise we consider that every part of what we 
term capital produces an income, and therefore a no-rent 
instrument is not a capital-constituting good — otherwise 
termed a capital good. 



LAND AND ARTIFICIAL INSTRUMENTS 179 

marginal or no-rent land, and, in a static state, it 
remains so. Any particular ship, wagon, engine, or 
other made tool begins its career as a rent payer and 
ends it as a- no-rent instrument. If we watch the 
whole social stock of instruments of production, we 
shall see the no-rent points not fixed in location, but 
shifting from place to place. Now this machine, 
now another, and now still another reaches the un- 
productive state and is supplanted by instruments 
of similar kind that are new and efficient. 

Original Elements in the Soil. — The real difference 
between the rent of a piece of land and that of a 
building, machine, vehicle, or any similar instrument 
arises from the fact that the land is not going to de- 
struction and the artificial instrument is. There are 
elements in what is commonly called land that wear 
out as do the tools that are used in tilling it, but these 
elements are not land in the economic sense. Land, 
as Ricardo long ago said, consists in the "original and 
indestructible powers of the soil." He singles out 
certain constituent elements of every farm, forest, 
building site, or other piece of what is called land in 
ordinary usage, and gives to this new concept the 
name land in an economic sense. These so-called 
"powers" are original elements because man does 
not make them; they are provided altogether by 
nature, and the only way in which man may be said 
to impart any productive power to them is by putting 
them into combinations in which they can produce. 
When men settle upon what has been vacant land, 
they bring the land into combination with labor, and 
when they break up the land for tillage and put build- 
ings on it, they combine it with artificial capital. By 
means of these combinations land acquires productive 



180 ESSENTIALS OF ECONOMIC THEORY 

power,- but physically considered, it is altogether a 
natural product. 

hidestrudible Elements in the Soil. — Land in the 
economic sense is indestructible because the natural 
effect of use is not to destroy it. This does not mean 
that it is not physically possible to destroy land to 
the extent of making it forever impracticable to use it 
in the ways in which land is commonly utilized. 
Nature may do this by sinking it beneath the ocean, 
and man can, if he will, do something akin to this; 
but he does not naturally destroy what is truly land 
in the using. It is impossible to use a plow, a spade, 
or a reaping machine without injuring it and, in the 
end, wearing it out. It is also impossible to draw the 
nutritive constituents out of the superficial loam and 
convert them into crops without exhausting the supply 
of these sources of fertility and so spoiling that which 
is commonly called the land, though it is not so in the 
economic sense. What is really land in this sense is 
not affected. Nitrates and phosphoric acid that lie 
in the topmost stratum of the soil are among the de- 
structible instruments of agriculture. The supply 
of them has to be renewed, if cultivation is continued, 
and they are therefore in the class with the plows, 
spades, and reaping machines which also wear out. 
But whatever there is in the soil that suffers no deteri- 
oration from any amount of use is the land with which 
political economy has to deal. 

The Gross and the Net Rent of Land Identical. — As 
land does not wear out and require renewal, all that 
it adds to the products of the labor and capital that 
are used in connection with it may be taken by the 
landlord as an income without reducing the amount 
of his property. Whatever land produces at all is 
a net addition to the general income of society. 



LAND AND ARTIFICIAL INSTRUMENTS 181 

Net Rent of Artificial Instruments Smaller than Gross 
Rent. — It is not safe, on the other hand, for the 
owner of buildings, tools, or live stock to take for his 
own consumption all that these produce. If he were 
to use up their gross produce as he gets it, he would 
find, in due time, that a considerable part of his prop- 
erty had vanished. Such instruments wear out and 
become worthless, and if no part of what they produce 
is set aside as a sinking fund with which to purchase 
other instruments to take their places, one whole 
genus of capital must go altogether out of existence. 

Artificial Instruments Self-replacing. — What act- 
ually happens is that these instruments create 
enough wealth to pay for their own successors, and 
that, too, besides paying a net return, which, regarded 
in one way, is interest. If you compute the whole 
product of one of these instruments by the Ricardian 
formula which we have examined, the amount of it 
will be whatever the instrument, during its entire 
career, adds to the product of the labor and of the 
capital that are used in connection with it ; and that 
includes the fund for renewal that has just been 
described, the amount, namely, which the owners must 
set aside for repairing the instrument and finally pur- 
chasing another. As the instrument itself provides 
this sinking fund, it may be said to create, in an in- 
direct way, its own successor. The ship earns, over 
and above the net income which is interest on its cost, 
enough to keep itself seaworthy so long as it sails and, 
in the end, to build another ship. The locomotive, 
the furnace, the loom, the sewing machine, the print- 
ing press, etc., all pay for and thus indirectly produce 
their own successors. 

The Net Rent of a Permanent Series of Similar 



182 ESSENTIALS OF ECONOMIC THEORY 

Instruments. — The first charge on the product of any 
instrument of this kind is the amount necessary for 
replenishing the waste of it and for providing a suc- 
cessor when this original instrument shall have been 
wholly worn out. In like manner, the first charge 
on the successor is providing a similar fund, and so on 
indefinitely. A part of the productive power of every 
one in an endless series of similar instruments is de- 
voted to this type of reproduction. The series main- 
tains itself and yields an income besides; and that 
remainder of its gross rent which is left after waste of 
tissue is repaired is available as a net income for the 
owner. This net remainder constitutes an interest 
on the owner's capital. He possesses a permanent 
fund of productive wealth embodied in the endless 
series of these perishable instruments, and the series 
taken as a self-perpetimting whole yields nothing but 
this interest. Each instrument, separately consid- 
ered, yields interest and a sinking fund ; but the sink- 
ing fund is not available as an income, since it must 
take shape as another instrument which serves to 
keep the series intact. What the first instrument 
creates in addition to the sinking fund is its contri- 
bution to interest, and what each instrument creates 
above what is required for virtual self-perpetuation 
is also interest. 

Interest and Net Rent Identical. — We may there- 
fore reduce interest to the form of a net rent by cal- 
culating the gross rent afforded by each instrument 
in such a series and by ascertaining how much of this 
merely repairs waste and how much is true income. 
As interest is usually expressed in the form of a per- 
centage, we may reduce the net rent to this form by 
comparing it with the cost of the first instrument. 



LAND AND ARTIFICIAL INSTRUMENTS 183 

which is the amount originally invested. The series 
of instruments will yield a net return every year. We 
can compute the gross return of each instrument 
according to- the Ricardian formula for measuring 
the product of the land. It will diminish from year 
to year and will ultimately vanish. We can add the 
several annual gross earnings of the instrument during 
its economic lifetime in the form of an absolute sum, 
which is the total rent of the instrument. From this 
we can deduct the cost of replacing this worn-out 
capital good, and the remainder will be the net rent 
of the instrument. We can, in a like way, get the 
net rent of all the following instruments in the series 
for a long period, add these net rents together, and get 
the true net earnings of the series for the time cov- 
ered by the calculation. If this chances to be ten 
years we may compare a tenth of this total, or the 
earnings of the series for one average year, with the 
cost of the first instrument, — which is the capital- 
ist's original investment, — and we shall thus get 
the fraction which represents the annual rate of 
interest on that investment. Perhaps in an average 
year the series has earned, above what is required to 
repair waste, five hundredths of what the first in- 
strument cost. That is, then, the rate of interest 
that the series as a whole, or the permanent capital, 
is yielding. The whole procession of instruments in 
which permanent capital is invested creates every 
year this fraction of its own value, over and above the 
sum that is needed to offset the wear and tear of an 
average year's use.^ 

* If the fund for replacing a costly capital good, such as 
a ship or a building, were allowed to accumulate for a term 
of years before being spent, the parts of it remaining on hand 



184 ESSENTIALS OF ECONOMIC THEORY 

General Interest as Rent. — If you compute the net 
income of all tools, machines, and other like things 
in the world, add the amounts, and get the grand total 
of them all, you have the entire income from this 
part of the capital of the world in the form of net 
rent. If then you compute the value of all this class 
of instruments and see how large a part of this value 
the net rent is, you translate this total rent into the 
form of interest, and therefore net rent and interest 
are the same income regarded in two different ways/ 

Stocks of Made Instruments graded in Quality as is 
Land. — It is necessary to notice the fact that the 
permanent series of tools, buildings, and other active 
capital goods shows forever the same gradations of 
quality that are found in the case of land. There 
are always to be found some instruments which are 
producing a large amount — that is, they are adding a 
large amount to the product of the labor and the fur- 
ther capital that are combined with them in produc- 
tion. A given amount of labor and capital creates 
much more wealth when working with a machine of 
the highest class than it would if distributed in mar- 
ginal positions ; and this is equivalent to saying that 
such an instrument is itself highly productive. Other 
instruments are to be found which are creating less, 
and there is never wanting a grade of no-rent instru- 

for some time would earn interest for their owner, and in his 
bookkeeping this would figure as reducing the amount he 
must save from the product of the ship or the building in 
order to replace it. This does not affect the general law of 
self-replacement, for the ship or building really produces 
what results from this compounding. 

^ In computing both of these values for comparison one 
should use a labor-cost standard, and we shall later see under 
what limitations such a standard may legitimately be used. 



LAND AND ARTIFICIAL INSTRUMENTS 185 

ments which are adding nothing to the marginal 
product of the other agents. It would be as well for 
the labor that used them if it should drop them and 
add itself to the force which is working with good in- 
struments. Any one manufactured instrument begins 
its career as a maximum-rent instrument and ends it 
as a no-rent one. The ship is at its best when it starts 
on its first voyage, and the mill is at its best in the first 
year of its running. Each instrument goes gradually 
downward in the scale till it reaches a stage in which 
it really produces nothing, since it adds nothing to 
what would be produced without it. The permanent 
series of instruments never thus deteriorates. All the 
depreciation of particular things is made good by the 
repairing and the replenishing which go on. In the 
series as a whole there are forever present grade 
number one, grade number two, grade number three, 
etc., exactly as in the case of land. If we wish, we 
can reckon the income that is to be gotten from each 
part of the series according to the old-time formula 
that Js famiharly used in the case of land, ''What 
labor and capital create by the use of this piece of 
ground in excess of what they would create if they 
were applied to the poorest land in use." For a 
grade of land read a grade of the self-perpetuating 
series of artificial instruments, and it will appear that 
each grade above the poorest yields, with the labor 
and capital that are combined with it, a surplus above 
what this labor and this capital could create if they 
were combined with the poorest grade in the perma- 
nent series. 

Different Modes of Destroying and Replenishing 
Stocks of Capital Goods of the Two General Classes. — 
The process of keeping up a stock of tools of trade 



186 ESSENTIALS OF ECONOMIC THEORY 

is unlike the process of keeping intact a stock of ma- 
terials and unfinished goods, because the modes in 
which the two kinds of capital goods deteriorate and 
perish are unlike. 

In the case of the raw materials that gradually 
ripen into articles for consumption and which we have 
called passive capital goods, the waste of tissues that 
takes place is quite unhke that which takes place in the 
case of active capital goods, the tools and implements 
that are used in the process. The raw material 
acquires value through the whole process, and in the 
end it gives itself, with all its acquired value, into the 
hands of the consumer. In a static state such goods 
embody the whole income of society, including the 
products of all labor and of all capital. 

A'" The series of A's represents the process of 
A" creating consumers' goods from the rawest 
A' material. The A'" as taken away for con- 
A sumption represents, as it were, the wasting 
tissue of passive capital goods; and it contains in 
itself the wages of all the labor in this series of sub- 
groups, the interest on all the capital there used, and, 
in addition to these, the sinking fund that is necessary 
in order to keep the active capital intact. Some of 
the articles of the kind A'" will have to be given over 
to the men who keep the tools, buildings, etc., in repair 
and replace them when they are worn out. The whole 
force of the industry of this group expends itself 
simply in making good the loss that the withdrawal 
of the A'" for use occasions. It does, in short, noth- 
ing but replace the perpetually wasting tissue of the 
-4's. All industry, except that of the makers of ac- 
tive instruments, may be considered in the light of an 
operation, the aim of which is to keep the stock of pas- 



LAND AND ARTIFICIAL INSTRUMENTS 187 

sive capital goods intact, or, what is the same thing, 
to keep the fund of circulating capital undiminished. 
Whoever puts anjrthing into this fund enables it to 
overflow and to furnish an income without suffering 
any diminution. The sole purpose of such capital is 
to overflow, that is, to suffer, at one and the same 
time, a loss and a replenishment which neutralizes 
the loss. It exists for nothing else except to ripen 
into consumers' wealth. Nevertheless, though the 
ripened A's are perpetually consumed, the series of 
^'s is abiding capital, is entitled to its share of inter- 
est, and is certain to get it. A part of the perpetual 
flow of A''''s is this interest. As the whole income 
of the society consists in A''"s, a certain number of 
the A'^"s that are withdrawn for consumption go to 
capitalists as interest on the permanent fund which is 
kept in existence in the form of A, A', A", and A'". A 
certain other part of the outflow of A"'^& goes also to 
capitalists as interest on that other permanent fund 
which is maintained in the form of tools, machines, 
and buildings, such as must everywhere be used in 
the series. A third part of the flow of A""s is wages 
of labor in this group; and a final portion is what we 
have called the sinking fund, the amount that is 
given over as an income to the producers in another 
group, not here represented, who keep the stock of 
buildings, tools, etc., intact. These four withdrawals 
of income constitute the process by which the stock 
of passive goods is depleted, and the grand resultant 
of all industry is to atone for that depletion. 

Labor and the Obtaining of its Product, in Static 
Industry, Synchronous. — One function of the per- 
manent series of -4's is to enable labor everywhere 
to get its virtual product without waiting, and that 



188 ESSENTIALS OF ECONOMIC THEORY 

too in the form in which it needs it for use. The 
labor that converts A" into A'" supphes the waste 
of tissue that takes place at that end of the line by 
withdrawal of an A'" . The labor that turns A' into 
A" replaces the waste that takes place at that point 
when an earlier A" becomes an A'" . The labor at 
A' replaces the waste at that point, and that at A 
replaces the waste at still another point. They are 
all at work keeping the stock of A's unimpaired, and 
one of them does as much toward keeping up the per- 
petual flow of A""s as any other. 

If we pump water in at one end of a full reservoir, we 
instantly cause it to overflow at the other end; and 
every worker in such a series as we have described 
may be thought of as putting something into the per- 
manent reservoir of capital and so causing a corre- 
sponding overflow. He gets his reward day by day 
as the work proceeds. Wherever a laborer may be 
in such a series, his work creates a ripened product 
as it goes on. He has not to wait for it. His work 
and its fruit are synchronous. 

Differences between Land and Made Instruments 
Apparent in Dynamic Conditions. — A point that has 
great theoretical interest is the nature of the difference 
between land and other productive instruments. In 
a static society the difference would be comparatively 
unimportant, but it is brought into prominence by 
the changes which constitute a dynamic state. The 
static hypothesis requires that capital should not 
increase or diminish in quantity, and that it should not 
change its forms. The equipment of every mill and 
of every ship is kept unimpaired but not enlarged or 
improved. There is a fixed number of spindles in the 
cotton mill, of lathes in the machine shop, of sewing 



LAND AND AETIFICIAL INSTRUMENTS 189 

machines in the shoe factory, etc., and this fact re- 
moves the most striking difference which, in a dynamic 
society, actually distinguishes land from other things. 

Land, in the economic sense, does not increase in 
quantity, however changeful and progressive a society 
may be. The chief distinguishing mark of land — 
that of being fixed in amount — separates it from 
other things only in a dynamic state and because 
of the action of the forces which produce organic 
changes. These are subjects to be studied in the 
dynamic division of economic theory. 

A Distinguishing Mark of Land which appears in a 
Static State of Industry. — In a static state there 
remains this difference between a piece of ground and 
a building, a tool, or any other instrument : the ground 
is not artificially made and does not perish in the using ; 
while the building or the tool or other appliance is 
so made and does so perish. It must in wearing 
itself out create in the indirect way which we have 
described its own successor. The engine must, by 
a part of its product, pay the men who will make 
another engine and so perpetuate the series of engines. 
This makes it necessary for the owner of the engine 
to save some of its gross rent to pay for depreciation 
and renewal, while he can safely use the whole rent 
of land. 

This Mark of Distinction not Applicable when Land 
is contrasted with a Permanent Stock of Capital Goods. 
— If we look, not at one particular instrument, but 
at an entire series of them, — if we take into view, not 
only the engine which is now driving the mill, but also 
the one that will succeed it, and again the one which 
will succeed that second engine, and so on forever, — 
this difference between land and the artificial in- 



]90 ESSENTIALS OF ECONOMIC THEORY 

strumentality vanishes. The series of engines, like 
land itself, yields only a net rent. The remainder of 
its gross product is not a true rent at all, since any 
one of the engines creating it has to consume it on 
itself and cannot give it to the owner as an income. 
This remainder pays certain men for keeping the 
series of engines intact, and what is given to them 
as pay for their services cannot accrue to any one 
as an income from the series of instruments so main- 
tained. It is the earnings of the corps of mainten- 
ance created by their own labor and capital. What 
the series of engines yields over and above what it 
expends in maintaining itself it gives to its owners 
as an income. This is their net return and they can 
use it without trenching on their property. The 
analogy between the returns from land and those 
from a self-perpetuating series of made capital goods 
is in this particular complete. 

The Source of the Fund for Repairs and Renewals. — 
The fund for repairs and renewals must, of course, 
like the net income itself, be furnished by instruments 
that are above the no-rent grade. A machine will 
naturally be used as long as it pays anything what- 
ever, and during the latter part of its career it usually 
produces less than mere interest on its cost. So 
long as the labor and the auxiliary capital that are 
combined with the instrument produce by its aid any 
more than they would produce if they were withdrawn 
from it and added, as marginal increments, to the 
labor and capital that are working in connection with 
good instruments, they will continue to use the ma- 
chine and they will abandon it only when it ceases to 
pay anything whatever. Out of the total amount it 
produces before reaching this point of abandonment 



LAND AND ARTIFICIAL INSTRUMENTS 191 

comes the amount that is needed as an offset for the 
cost of providing a new machine. 

Incorrectness of a Common Statement concerning 
Rent and Price. — This brings into view a striking 
fallacy of what has been current economic theory. It 
has been customary to claim that the rent of land "is 
not an element in price," although the interest on capi- 
tal is such an element. The rent of land is the net 
product of land ; and if interest be kept distinct from 
it, this income is the net product of a permanent stock 
of capital goods. The relations of these two com- 
ponent parts of the constant output of goods to the 
prices of the goods are identical. 

Proof of the Incorrectness of the Current Statement 
concerning Rent and Price. — The vague form of the 
current statement concerning rent and price is re- 
sponsible for much confusion of thought on that 
subject. What the statement would mean is that 
the price of wheat is not affected by the great con- 
tributions to the supply of it which good lands are 
making. These contributions are the rent in its orig- 
inal form. The rent of wheat land is wheat, that of 
cotton land is cotton, that of mill sites is manufact- 
ured goods, etc. That money is used in payments 
made to landlords changes nothing that is essential. 
To say that such contributions to the supply of par- 
ticular commodities are not an element in determin- 
ing the prices of them, would be as unreasonable as 
to make the same assertion concerning other parts 
of the supply. Quite as logically might it be asserted 
that other components in the supply do not affect 
prices — that the amount of wheat which is attribu- 
table to harvesting machinery or the amount of calico 
which is imputable to looms has no influence in the 
market values of these articles. 



192 ESSENTIALS OF ECONOMIC THEORY 

Why the Produce due to Good Land prevents Prices 
from greatly Rising. — If the use of good wheat land 
were merely discontinued, the supply of wheat would 
of course be not only lessened, but reduced almost 
to nothing, and a famine price would at once result. 
If, now, an attempt were made to make good the short- 
age of the supply of this cereal by tilling lands which 
are now at the margin of cultivation, it would at once 
appear that not enough of such land exists to enable 
us to accomplish the purpose, and it would be neces- 
sary to push the margin outward and till poorer and 
poorer soils, at a greatly enlarging cost. We should 
grub out worse thickets, drain worse swamps, terrace 
more discouraging hillsides, irrigate more remote and 
barren deserts, etc. All this would mean a greater 
cost of production of wheat and a higher price for it 
in the market. 

It would also mean another thing. The extending 
of the margin of cultivation which makes it include 
poorer grades of land causes that part of the area now 
tilled which does not command any rent to yield one. 
After the margin should have been greatly extended 
and finally located in a region where getting anything 
out of the soil would require a struggle, it would ap- 
pear that all of the lands newly annexed to the cul- 
tivated area except the last and poorest would com- 
mand a rent. All but those on the new margin would 
add a definite quota to the supply of wheat, and this 
contribution would be their rent. Entering into the 
supply, it would of course count in the adjustment of 
price. 

What can reasonably he conceded concerning Rent 
and Price. — There is another possible meaning of 
the phrase ''Rent is not an element in price"; and, 



LAND AND ARTIFICIAL INSTRUMENTS 193 

whether it was clearly in the minds of those early 
economists who made the assertion or not, it is what 
their argument proves. The payment of rent by 
tenants to landlords has no effect on the market 
value of the produce. ''Food would not become 
cheaper," says Professor Fawcett, " even if land were 
made rent free." There would be the same need of 
food stuffs as before, and the tillage of lands would be 
pushed to the present margin, where the yield is 
smallest. The cost, in labor and capital, of that mar- 
ginal part of the supply of food which has come from 
these poorest lands would continue to be what it has 
been heretofore. The farmers would, of course, get 
from the good lands the same surplus that they get at 
present; but the fact that land had been made rent 
free would enable them to keep it. This surplus is, 
of course, rent, and transferring it from landlords to 
tenants does not affect prices. So much of the doc- 
trine formerly current is true ; and it would have fore- 
stalled much confused thought as well as much con- 
troversy if the statement concerning rent and price 
had made it clear that any rent in its original form is 
an element in the supply of produce, and the existence 
of it helps to determine prices, while the payments 
made by tenants to landlords do not affect them. If 
these payments should cease and the tenants should 
retain the rent, prices would continue to be what they 
now are.^ 

* The claim that rent is not an element in price making 
might be made in the case of artificial instruments of pro- 
duction as reasonably as it can be made in the case of land. 
If it means that the existence of the rent has no effect on price, 
it is wholly incorrect in both cases. The statement may be 
so changed as to tell what is true concerning the rent of land, 
and it will then also tell the truth about the product of the 
o 



194 



ESSENTIALS OF ECONOMIC THEORY 



artificial instruments, which is interest in its original form. 
These statements may be made in parallel columns, and one 
will be as true as the other and no truer. 



A needed part of the supply 
of wheat is grown on marginal 
land. 

The price of the wheat must 
pay for the labor and capital 
used on this land. 



The price of wheat raised on 
good land is the same as that of 
wheat raised on the marginal 
zone, and it affords a surplus 
above wages and interest paid 
by farmers for labor and capi- 
tal used in the tilling of the 
good land. 



A needed part of the supply 
of woolen cloth is woven on 
marginal looms. 

The price of the cloth must 
pay for the labor and capital 
that, in the woolen manu- 
facture, are combined with 
these looms. 

The price of cloth woven 
on good looms is the same as 
that of equally good cloth 
woven on marginal ones, and 
it affords a net surplus above 
the cost of maintaining the 
stock of looms and the wages 
and interest paid by manu- 
facturers for further capital 
used in connection with the 
good looms. 

The existence of this sur- 
plus in its original form, that 
of cloth, affects the supply 
and the price of this product. 

The fact that entrepre- 
neurs pay capitalists for this 
surplus has no effect on the 



The existence of this sur- 
plus in its original form, that 
of wheat, affects the supply 
and the price of that product. 

The fact that farmers pay 
landlords for this surplus has 
no effect on the price of wheat. 

price of cloth. 

The more important facts concerning rent have reference 
to the original form of it, namely, a product in kind. What- 
ever constitutes a part of the supply of anything affects the 
price of it. The surplus afforded by good looms is an element 
in the supply of cloth, and that afforded by good land is an 
element in the supply of wheat. They make these two supplies 
larger than they would otherwise be, and of course they are of 
cardinal importance in determining price. The rent of any- 
thing is an element in the supply of some kind of goods, and 
the annihilation of it would reduce the supply and raise the 
price of product in which, in its first estate, it consists. 



CHAPTER XII 

ECONOMIC DYNAMICS 

The Efficiency of Static Forces in Dynamic Societies. 
— The static state which has thus far been kept in 
view is a hypothetical one, for there is no actual society 
which is not changing its form and the character of its 
activities. Five organic changes, which we shall soon 
study, are going on in every economic society; and 
yet the striking fact is that, in spite of this, a civilized 
society usually has, at each particular date, a shape 
that conforms in some degree to the one which, under 
the conditions existing at that date, the static forces 
acting alone would give to it. It is even true that, 
as long as competition is free, the most active societies 
conform most closely to their static models. If we 
could check the five radical changes that are going on 
in a society that is very full of energy, — if, as it were, 
we could stop such an organism midway in its career 
of rapid growth and let it lapse into a stationary con- 
dition, — the shape that it would take would be not 
radically unlike the one which it had when we inter- 
posed the check on its progress. Taking on the theo- 
retically static form would not strikingly alter its 
actual shape. The actual form of a highly dynamic 
society hovers relatively near to its static model 
though it never conforms to it. In the case of slug- 
gish societies this would not be true ; for if in one of 
them we stopped the forces of growth and waited long 
enough to let the static influences produce their full 

195 



196 ESSENTIALS OF ECONOMIC THEORY 

effects, the shape to which they would bring the or- 
ganism would be very different from the one which 
it actually had when its slow progress was brought to 
a stop. Most efficient in the most changeful societies 
are forces which, if they were acting by themselves 
alone, would produce a changeless state. The reasons 
for this will later appear. 

Differences between Static Forms of Society at 
Different Dates. — A highly dynamic condition, then, 
is one in which the economic organism changes rapidly 
and yet, at any time in the course of its changes, is 
relatively near to a certain static model. It is clear, 
therefore, that it cannot, at different periods, conform 
even approximately to one single model. If the 
forces of change which in 1800 were impelling the 
industrial society of America to a forward move- 
ment had been suppressed, and if competition had 
been ideally free and active, that society would before 
long have settled into the shape then required by the 
forces which, in the preceding chapters, we have de- 
scribed. Some labor would have moved from certain 
occupations to others and gained by the change ; and 
this movement of labor would have ended by making 
the productive power and the pay of a unit of this 
agent uniform in all the different subgroups of the 
system. Capital would have so apportioned itself as 
to level out inequalities in its earning power. The 
profits of entrepreneurs would have been equalized 
by becoming in all cases nil, and the best available 
methods of production would everywhere be found 
surviving and bestowing their entire fruits on laborers 
and capitalists. All this is involved in saying that 
the static model, the form of which was determined 
by the conditions of 1800, would have been realized. 



ECONOMIC DYNAMICS 197 

This would have been brought about by suppressing at 
that date the forces which cause organic change and 
by giving to competition a perfectly unobstructed 
field. If we had done this in 1900, instead of at the 
earlier date, economic society would, in a like way, 
have conformed to the shape required by the condi- 
tions of 1900; and this would have been very dif- 
ferent from the shape which the static forces would 
have given to society a century earlier. There is an 
ideal static shape for every period, and no two of 
these static shapes are alike. 

Differences between the Actual Shape of Society and 
the Static One at Any One Time. — The actual shape 
of society at any one time is not the static model of 
that time; but it tends to conform to it, and in a very 
dynamic society is more nearly like it than it would 
be in one in which the forces of change are less active. 
With all the transforming influences to which Amer- 
ican industrial society is subject, it to-day conforms 
more closely to a normal form than do the more con- 
servative societies of Europe and far more closely 
than do the sluggish societies of Asia. A viscous 
liquid in a vessel may show a surface that is far from 
level; but a highly fluid substance will come nearly 
to a level, even though we shake the vessel containing 
it vigorously enough to create waves on the surface 
and currents throughout the whole mass. This is a 
fair representation of a society in a highly dynamic 
condition. Its very activities tend to bring it nearer 
to its static model than it would be if its constituent 
materials were not fluid and if it were never agitated. 
The static shape itself, though it is never completely 
copied in the actual shape of society, is for scientific 
purposes a reality. There are powerful influences 



198 ESSENTIALS OF ECONOMIC THEORY 

tending to force the industrial organization at every 
point to conform to it. The level of the sea is a real- 
ity, though the motion of the waters never subsides 
sufficiently to make their surface accurately conform 
to it. As vigorously agitated, the water shows a 
surface that is nearer to the ideal level than would an 
ocean of mud, tar, or other sluggishly flowing stuff. 
The winds throw up waves a few feet high, but the 
fluidity keeps the general surface surprisingly level; 
and so civilized society, made as it is of fluid material 
kept in vigorous agitation, finds, as it were, its level 
easily. If in any year we could and should stop the 
dynamic disturbances, the economic society would as- 
sume the static shape which the conditions of that 
year called for as readily as the sea would find its 
normal level if winds and tides should completely 
cease. Static influences that draw society forever 
toward its natural form are always fundamental, and 
progress has no tendency to suppress them. 

Competition a Cause of Rapid Changes in the Stand- 
ard Shape of Society and of a Quick Conformity of the 
Actual Shape to the Standard One. — The competition 
which is active enough to change the standard shape 
of society rapidly — that, for example, which spurs on 
mechanical invention and causes a large profit to be 
realized in a particular subgroup — has also the effect 
of calling labor and capital quickly to the point at 
which the profit appears, and, in the absence of any 
monopoly, reduces this profit to nil and restores, in so 
far as this cause of disturbance goes, the equilibrium 
of the groups. Under the influence of active compe- 
tition a particular group frequently undergoes quick 
changes which call for more labor and capital, but it 
gets them quickly; and, as has just been said, the 



ECONOMIC DYNAMICS 199 

standard shape of a society which is in this highly 
fluid condition does not differ so much from the actual 
shape as does that of a society the movements of which 
are sluggish. The standard shape is like the hare that 
moves quickly and irregularly ; while the actual shape 
is like the pursuing hound, which moves equally 
quickly, follows closely all turns of the course, and, if 
the game were to stop moving, would in short order 
close on it. 

The Equalization of the Productive Power of Labor 
and of Capital in the Different Subgroups. — We 
have seen that in a static state labor and capital do 
not move from subgroup to subgroup in the system, 
and that this absence of flow in a fluid body is not 
brought about by monopoly or by any approach to , 
it. That, indeed, would obstruct transfers of the 
producing agents from point to point; but monopoly 
is a thing most rigorously excluded by the static 
hypothesis. At every point we have assumed that 
the power to move is absolute, while only the motive 
is lacking. The equalization of the productive power 
of labor in the various subgroups precludes the mi- 
gration of labor, and a like equalization precludes a 
migration of capital. 

Equalization of Productive Powers within the Sub- 
groups. — Not merely must each unit of labor or of 
capital be able to create as much wealth in one sub- 
group as in another, but within the subgroup — 
the specific industry — each unit must be able to cre- 
ate as much under one employer within the industry 
as under another. The different entrepreneurs must 
compete with each other on terms of equality, and no 
one of them must be able to wrest from a rival any 
part of the rival's patronage. So long as one com- 



200 ESSENTIALS OF ECONOMIC THEORY 

petitor has an advantage over another in his mode of 
creating a product, there is no equilibrium within the 
subgroup. The more efficient user of labor and 
capital is able to draw away labor and capital from 
the less efficient one, and the self-seeking impulse 
which is at the basis of competition impels him to do 
it. The producer who works at the greater advantage 
is foreordained to underbid and supplant the one 
who works under more unfavorable conditions. That 
a static state may exist and that the movements 
of labor and capital from point to point may be pre- 
cluded, every competitor within a subgroup must be 
able to keep his business intact, hold his customers, 
and retain in his employment all the labor and the 
capital that he has. 

Equality of Size of Productive Establishments not 
Necessary. — Size is, as we shall see, an element of 
efficiency, and the great establishment often sells 
goods for less than it would cost a small one to make 
them. The small manufacturer often finds that he 
would best become a mere merchant, buying some of 
the products of the great mill and selling them to his 
customers, rather than continue making similar goods. 
In the general market an approach to equality of size 
is usually necessary in order that competitors may be 
on even terms. This does not preclude the survival 
of many small establishments. The local retailers 
have an advantage over great department stores in 
the filling of small orders. When one has to buy what 
costs a dollar it does not pay to spend a dime in car- 
fares, and waste a dollar's worth of time in order 
to secure the thing for ninety cents. Weariness to 
customers is here the element that gives to the small 
producer his advantage and enables him to keep that 



ECONOMIC DYNAMICS 201 

part of the business which comes in the form of many 
small orders; but small producers often have other 
advantages than those which depend on location. 
In a shop which is more like that of a craftsman of 
three centuries ago than it is like the great furniture 
factory, a cabinetmaker can make a single chair of 
a special pattern more cheaply than the great manu- 
facturer can afford to do it. The great shop requires 
that there should be many articles of a kind turned 
out by its elaborate machines in order that the owner 
should get the benefit of their rapid and unerring 
action. There will long be at work hand presses 
much like those used by Benjamin Franklin, besides 
the complicated automata which do the bulk of our 
printing, because for printing a dozen copies of any- 
thing the lever press is the cheaper. There will be 
shoemakers who not only mend shoes but occasionally 
make them for customers who want other than 
standard kinds; and local tailors are sure to survive. 
Only in the general market and in the making of 
standard goods is size essential to success. 

A Considerable Number of Competitors Assumed. — 
The most striking phenomenon of our time is the 
consolidation of independent establishments by the 
forming of what are usually called trusts; and this 
and all the approaches to it are precluded by the static 
hypothesis. There is a question whether, after 
competition has reduced the establishments in one 
subgroup to a half dozen or less, they would not, even 
without forming a trust, act as a quasi-monopoly. 
This question we have at the proper point fully to 
discuss, but here it is necessary to assume that noth- 
ing which creates even a quasi-monopoly exists. 
We shall find that competition usually would, in 



202 ESSENTIALS OF ECONOMIC THEORY 

fact, survive and be extremely effective among as 
few as five or six competitors, till they formed some 
sort of union with each other. To avoid all uncertainty 
we assume that in the static state in which values, 
wages, and interest are natural and in which each sub- 
group has its perfectly normal share of labor and capital, 
there are competitors enough in each occupation to 
preclude all question as to the continuance of an 
active rivalry. 

Static Values and Prices. — The equilibrium re- 
ferred to requires that all values should stand at their 
static levels, which means that the prices of goods 
should be the "cost prices" of the older economists. 
The entrepreneur should make no net profit on the 
goods he is producing. The wages of labor must be 
productivity wages, since each man must get the 
amount of wealth that he brings into existence. 
Interest on capital needs, in like manner, to be pro- 
ductivity interest, and each unit of capital must get 
the amount it creates. Moreover, the prices of goods, 
as expressed in money, must be accurate representa- 
tions of the comparative values of goods. All these 
features mark the static state; but the most obvious 
mark of distinction is the absence of movement from 
group to group. We shall see that values are ulti- 
mately measured in marginal labor, and as the value 
of money is measured in the same way, it follows that 
the price of each article, as expressed in money, is in a 
static state a correct expression of the comparative 
amount of labor that will make it. And the entire 
relation of commodities to each other and to labor can 
be expressed by the medium of currency. If a unit of 
labor produces gold enough to make an eagle, and if 
any commodity sells for ten dollars, it will be safe to 



ECONOMIC DYNAMICS 203 

infer that it is also produced by one unit of labor. 
If one commoditj'' sells for ten dollars and another 
for five dollars, the former is the product of twice as 
many units of marginal labor as is the latter. This 
remains true only while currency continues to be in 
its normal state and all other static adjustments 
continue complete. 

Influences that disturb the Static Equilihrium. — 
It might seem that the influences that disturb such 
a static equilibrium are too numerous to be described ; 
and yet these changes may be classed under five 
general types : — 

1. Growth of Population. — The supply of labor is 
increasing, and this fact of itself calls for continual 
readjustment of the group system. 

2. Increase of Capital. — The amount of capital 
is increasing, and this change also disturbs the static 
equilibrium and calls for a rearrangement. As far 
as wages and interest are concerned, the effect of this 
latter change is the opposite of that which follows 
an increase in the amount of labor. When people 
become more numerous, other things remaining equal, 
their individual earning capacity becomes smaller. 
The increase of capital reduces the earning power of 
each unit of the supply of it and depresses the rate of 
interest ; but it raises the rate of wages, for it causes 
labor itself to act more efficiently. 

It is to be noted, indeed, that when new laborers 
enter society they become consumers as well as pro- 
ducers, and this affects the utility and the value of 
goods. When more people use a given amount of 
consumers' wealth, values, measured in ultimate units 
of utility or disutility, rise. An increase of capital 
does not directly neutralize this effect, since it does 



204 ESSENTIALS OF ECONOMIC THEORY 

not change the number of consumers ; but it multiplies 
commodities and brings down their utilities and their 
values. The rise of '^ subjective " values which follows 
an influx of laborers is an indication of diminished 
wealth per capita, and the reduction of values which 
follows an influx of capital is a sign of increased 
wealth per capita. 

3. Changes of Method. — Changes take place in 
the methods of production. New processes are de- 
vised, improved machines are invented, cheap motive 
powers are utilized, and cheap and available raw ma- 
terials are discovered, and these changes continu- 
ally disturb the static state. There are certain to be 
improvements on the older methods of production, 
for a law of the survival of the fittest insures this. 

Under competition the process that, with a given 
amount of labor and capital, turns out a larger product 
inevitably displaces one that turns out less. The 
employer who is using the better method undersells 
those who use inferior ones, and forces them either to 
improve their own methods or to go out of business. 
Working humanity as a whole is therefore making a 
constant gain in producing power, as man's appliances 
equip him more and more effectively for his conflict 
with nature and enable him to subjugate it more 
rapidly and thoroughly. It would seem that they 
ought to have only good effects on wages, and in the 
long run they invariably do have such effects. In the 
absence of improvements there would be little hope 
for the future of wage earners. The immediate effects 
of improvements upon individual workers, as we shall 
see, are not always unqualifiedly good, but the essen- 
tial effect is the general and permanent one, and the 
character of this has been attested by past experience 



ECONOMIC DYNAMICS 205 

too fully to be in doubt. In improvements in produc- 
tion lies the hope of laboring humanity. Nearly the 
whole earning power of the labor of the present day 
is the result- of improvements that have taken place 
in the past, though these gains have not been secured 
without causing local and temporary hardships. If 
in the future the wages of labor are doubled or quad- 
rupled, as the result of a series of improvements 
beginning now and extending to a remote period, this 
progress cannot be secured for nothing. The costs 
will be less than those attending improvements of the 
past, but they will be real. The most important 
fact is that they tend to become fewer and smaller 
and that the gains immeasurably exceed them. 

4. Changes in Organization. — There are changes 
in the mode of organizing the establishments in which 
commodities are produced, and so far as these occur 
under a regime of active competition, they also are 
improvements and give added power of production. 
The mills and shops become larger and relatively 
fewer.' There is a great centralizing movement going 
on, since the large shop undersells and suppresses the 
smaller one, and combinations unite many great shops 
under one management. The effect of this, when it 
takes place in a perfectly normal way, is akin to that 
of improvements of method. It benefits society as 
a whole somewhat at the cost of individual members 
of the body, and it causes wages to rise by adding 
continually to the wealth-creating power of the men 
who earn them. We shall see that when consolida- 
tions repress competition their effect is far from being 
thus wholly beneficial, and that not only are particu- 
lar persons injured by them, but the community as a 
whole has a serious bill of charges to bring against 



206 ESSENTIALS OF ECONOMIC THEORY 

them. The securing of the gains that come by con- 
soHclation without such evils is an end the realization 
of which will tax the statesmanship of the future. 

5. Changes in Consumers^ Wants. — The wants 
of consumers are changing. They are growing more 
numerous as well as more refined and intellectual. 
This expansion of desires follows the general increase 
of productive power, since every one already wants 
some things that he cannot procure, and all society 
has a fringe of ungratified wants just beyond the limit 
of actual gratification. Even if all these wants that 
are now near the point of actual satisfaction were to 
be satisfied, the desires would at once project them- 
selves farther. The mere increase in earning power 
without any special education enlarges the want 
scale, but intellectual and moral growth cooperates 
with it in that direction and calls latent wants into 
an active state. More and more eagerly do men seek 
things for which the desire was formerly dormant. 
Changes of this kind affect values, cause labor and 
capital to move from group to group, and thus cause 
society as a whole to produce less of some things and 
more of others. They sometimes cause wholly new 
groups to appear, and draw workers and equipment 
from the old ones. 

Advantage of Diversity of Wants. — One very 
marked effect of the diversification of wants is to in- 
crease the aggregate utility of a mass of commodity 
produced with a given expenditure of labor. Measure 
the whole wealth available for consumption on the 
basis of the labor that it takes to create it, and it will 
appear that it has more utility and is worth more to 
society in consequence of this evolution that is going 
on in the nature of the individual consumer. A 



ECONOMIC DYNAMICS 



207 



given amount of labor benefits most the men whose 
wants are of the most varied character. If A, B, 
and C are three commodities, and if their several 
utilities decline, as successive units of them are given 
to a consumer, along the curves descending from the 
letters A, B, and C of the diagram, it is clear that the 
man whose consumption is confined to the commodity 
A gets less benefit from three units of wealth than 
does the man who con- 
sumes A, B, and C. ^ 
The utility of the first 
unit of A is measured 
by the vertical line 
from A to the line DE, 
that of the second by 
the line from A^ to 
DE, and that of the 

third by the line from A'^ to DE. The utility of the 
first unit of B is measured by the distance from B to 
the hne DE and exceeds that of the second unit of A 
by the- difference between the lengths of those lines. 
In like manner the utility of C exceeds that of the 
third unit of A by the difference between the length 
of the line descending from C and that of the one 
descending from A'^ The dechning utility of the 
income of the man who satisfies three wants is repre- 
sented by the slowly descending curve ABC, while 
the diminishing utility of the income of the man who 
satisfies only one want declines along the sharply de- 
scending curve A, A' , A" } 




* For studies of the effect of diversified wants, see S. N. 
Patten, " Consumption of Wealth." It will be seen that ac- 
count must be taken first of the natural expansion of the want 
which comes from an increase of productive power, and second 



208 ESSENTIALS OF ECONOMIC THEORY 

Changes in Static Standards. — The grand resultant 
of all the changes that are going on in the more highly 
civilized countries is a continual rise, not only in 
actual wages but in the theoretical standard of wages. 
The static or "natural" rate of pay for labor to-day 
is higher than it was fifty years ago and lower than it 
will naturally be fifty years hence. Removing all 
disturbing influences and letting society settle to-day 
into a perfectly static condition would reveal the 
theoretical standard of present wages. Doing the 
same thing after a lapse of fifty years would show 
what would then be the natural or standard rate; 
and this would be higher than the present one. Not 
only would -the actual pay of labor have risen, but the 
standard to which it tends to conform would have 
become higher after every interval. The actual rate 
of wages at any one time varies from the standard; 
but as both rise from decade to decade, the actual 
rate hovers all the while within a certain distance of 
the standard one. 

Effects on Values. — In the same way the values of 
goods measured in labor will in general be declining 
values. At no one time will actual market prices 
accurately express the amounts of marginal labor that 
are required for producing different articles, but they 
will approximately express this. Articles will sell 
in the market for about enough to pay for the labor 
that, when used as marginal labor, suffices to produce 
them; and as this amount of labor put into a given 
article grows less and less, the prices of the goods 
will actually pay for fewer and fewer days' labor. 

of the changes in the quahty of the wants to be gratified, which 
sometimes go ahead of any change in the productive system 
and call for new kinds of commodities. 



ECONOMIC DYNAMICS 209 

The standard price of anything will be the amount 
of money that is needed to pay for the labor of making 
it, provided always that we are careful to use only 
empty-handed labor in applying the test and that we 
put that labor in the marginal position, as described 
in Chapters IV and V, and so disentangle the product 
that is attributable to it from that which is imputable 
to capital. If wages, as paid in money, remain sta- 
tionary, normal prices will decline and actual prices 
will hover about them in their downward course, so 
that goods will actually buy smaller and smaller 
amounts of labor, or, what is the same thing, labor 
will secure as its pay more and more goods. ^ 

1 In measuring the cost of goods in labor, in Chapters IV 
and V, we disentangled from the amount of goods which 
is the joint product of labor and capital, the part which is 
attributable to labor only. The mode of doing this is there 
more fully stated. The old and crude method of using a 
labor standard of value — which assumes that the product 
of a unit of labor aided by capital will always buy the product of 
another unit of labor aided by capital — we must take all 
pains to avoid. 

In connection with the cost in labor of different articles 
it is to be remembered that in agriculture the effect of im- 
provements of method may not always suffice to counteract 
the working of the so-called law of diminishing returns, 
which insures, with agricultural science in a given state of 
advancement, smaller products per capita when there are 
more men on a given area. That this influence should pre- 
ponderate over that of improved processes requires that popu- 
lation should increase with a degree of rapidity which may 
or may not be maintained. 



CHAPTER XIII 

THE LIMITS OF AN ECONOMIC SOCIETY 

When we try to establish a standard to which 
wages generally tend to conform, the question arises 
how much of the earth we have in view. Is there a 
rate at which the pay of labor in Europe, Asia, 
Africa, Australia, and America tends to settle and 
remain ? Is there a common rate of interest that is 
normal in all these grand divisions, and are there also 
general standards of value for goods which govern 
their prices in all the markets of the world ? If there 
are no such standards having universal validity, are 
there any that are valid within single geographical 
divisions? On what principle can we divide the 
earth into sections for economic purposes? These 
are some of the questions which must be answered 
if a theory of distribution is to have any definiteness 
of meaning, and they arise whenever we try to es- 
tablish a static standard of any kind. If we talk 
about natural wages, we must know in how much of 
the world they are natural. The questions become 
even more urgent when we try to solve dynamic 
problems. We shall have to determine the effects 
of an influx of labor into the economic society we 
are studying; but does this mean an increase of 
population in the world as a whole ? Does an influx 
of capital have a similar comprehensive meaning, 
and does an improvement in the method of pro- 
ducing some commodity mean a change in the 

210 



THE LIMITS OF AN ECONOMIC SOCIETY 211 

mode of making it in every part of the world where 
it is produced at all? We need to know how ex- 
tensive the society is whose activities we are 
examining. 

Characteristics of an Economic Society. — We have 
said that there are natural rates of wages, etc., 
within some area, which we have regarded as con- 
taining an economic society, and we have treated 
this social organism much as though it were as 
isolated and self-contained as would be an inacces- 
sible island with its population. It has one general 
market where values are fixed. A farmer within 
the area covered by our studies produces wheat 
for the whole society^ and in one way or another, 
every person within the area is a bidder for it. A 
shoemaker makes shoes and a weaver makes cloth 
to offer to everybody. Each part of the organism 
ministers to the whole and is ministered to by the 
whole. Competition is ideally free and in a sense 
is universal. The general system of groups made 
up of the A's, the B's, the C's, and the H's of our 
table illustrates the manner in which this com- 
plete and self-contained society is organized. In 
the static state there is one standard of wages for 
all these groups and their subdivisions and one 
equally general standard of interest. The price 
of a commodity, barring some allowance for cost 
of carrying it, is uniform everywhere. A reduced 
price for A'" in any part of the area where this 
society dwells would set men bidding for it from 
every quarter of that area and would thus bring 
the local prices to uniformity. So a high rate of 
pay for labor in one part would at once lure men 
from every other part and reduce the high pay to 



212 ESSENTIALS OF ECONOMIC THEORY 

the standard generally prevailing. The picture is 
that of a social body having a large geographical 
extension and yet intensely sensitive at every point 
to economic influences. Prices, wages, and interest 
everywhere respond at once to an influence that 
originates in any part of the extended area. In 
technical terms this means that there is perfect mo- 
bility of labor and capital within the group system 
represented by the table, and that this involves 
equally perfect mobility as between parts of the 
area that the groups inhabit. Men move from one 
section of the country to another in response to an 
economic inducement as readily as they do from 
the group A to the group B. 

Barriers which divide the World into Economic 
Sections. — Now it is clear that in the actual world 
changing one's place of abode is difficult, and even 
sending capital from place to place is somewhat so. 
Inequalities of earning power are not leveled out 
by a quick migration of laborers from China to 
Europe or to America. In their methods of pro- 
duction the different regions are not brought to 
a uniformity, for there is machine labor here and 
hand labor there; and it is vain to expect that ma- 
chines will quickly become universal and that the 
practical arts in America, Africa, and Asia will be 
rendered uniform by such a quick adoption of the 
most efl&cient processes as economic law, in the 
absence of friction, requires. 

Boundaries of the Society which is here Studied. — 
If we take the world as a whole into the circle covered 
by our studies, we find that labor, compared with 
other economic elements, decidedly lacks fluidity 
and does not easily move. So far from being like 



THE LIMITS OF AN ECONOMIC SOCIETY 213 

water, which flows readily and finds its level quickly, 
it is more like tar or other viscous stuff, which flows 
slowly and is long in leveling out local irregularities 
in its surface. In the world as a whole there are 
regions crowded with people and other regions 
nearly unpeopled, and long will it be before some of 
these differences will be much reduced. Many 
centuries, indeed, must pass before they are entirely 
removed. If, however, we take the most active 
part of the world, — western Europe, most of North 
America, Japan, and the more fully settled parts of 
Australia, — labor will show a degree of mobility 
that makes it more like the water of the illustration, 
and capital within this active center of industrial 
operations will be more fluid still. Prices here 
tend toward certain general standards, and pro- 
cesses of production and methods of organizing the 
forces which do the producing work tend strongly 
toward uniformity. The best processes and the 
best forms of organization tend generally to survive. 
There are imperative reasons for studying the econ- 
omy of this highly civilized region, the center 
of the economic activities of the world, apart from 
that of the more undeveloped regions.^ 

The Need of a Rule hy which a Part of the World 
may he Treated as an Economic Society. — This in- 
volves finding a way by which we can treat a limited 
part of the world much as though it were, for our 
purposes, the whole of it. In essential ways the 
economic center that we have described does act 

^ This is far from implying that economic laws do not 
work in the excluded outer area or that no effects are produced 
within the central area by causes that originate in the outer 
zone. How these things take place we shall later see. 



214 ESSENTIALS OP ECONOMIC THEORY 

somewhat as if it were an organism complete in 
itself. We must draw a boundary line about the 
area of active movement, of lively interchanges, 
and of general sensitiveness to economic influences, 
thus separating it from the broader zone of sluggish 
movement of capital and population, of slow response 
to economic stimuli, and of generally backward 
conditions. 

Freedom of Movement as a Test. — In Europe, 
America, and the other advanced regions goods 
are carried from place to place so easily and quickly 
that there is a tendency toward uniform prices; 
and such local differences of price as exist in the 
case of any commodity do not much exceed the 
cost of getting it carried from one place to another, 
though in the cost of moving it there must often 
be reckoned the toll which a government takes at 
the customhouse. Capital moves freely, and there 
is a certain approach to a general level of interest, 
though here also local differences of course survive. 
The obstacle to the moving of capital from one 
place to another, if the owner does not go with it, 
is occasioned mainly by the risk it encounters and 
by a virtual bill for insurance. With allowance 
for this cost, rates of interest in the region we have 
described tend toward a general level. Though 
labor migrates more slowly than capital, it moves 
far more rapidly within the economic center than 
in the outer zones. Processes of production are 
not brought to a complete uniformity within the 
center, but they tend powerfully toward it; for 
while obstructions exist, they surely and not always 
slowly yield. With due regard for such differences 
of method as those existing between the European 



THE LIMITS OF AN ECONOMIC SOCIETY 215 

ways of making products and the American ways, 
we may say that the tendency toward the general 
survival of the best methods is too strong to allow 
any important differences to be permanent. Every- 
where, in short, within the central area there is 
a strong tendency to conform to economic standards 
in the matter of prices, wages, interest, industrial 
processes, and forms of economic organization. The 
standards are what we have defined as the static 
ones. If we should stop progress and all disturb- 
ing influences and wait long enough, we should 
see values, wages, interest, etc., take a static level 
throughout the vast area. This, . however, would 
require that migrations should go on till all induce- 
ment to move from place to place should have ceased 
to exist. Population would then have distributed 
itself over the land in the most advantageous way, 
and no body of people would be better off than any 
other by reason of the location of their abode. A 
long period would be needed to bring about this 
adjustment even within the circumscribed area where 
influences that make for change are very active 
and where obstacles are far smaller than they are 
in the uncivilized regions. 

Essential Density of Population. — A perfectly 
static state requires, not a perfectly equal distribu- 
tion of population, but such a distribution that there 
is no reason for further migrating. The power of 
the soil to feed its inhabitants varies with its fertility. 
Where the land is highly productive a dense popu- 
lation may live easily ; whereas on a sterile soil even 
a sparse population may find natural resources too 
meager, and men may move to places which are 
more thickly peopled and yet may gain by the change. 



216 ESSENTIALS OF ECONOMIC THEORY 

Moreover, such occupations as manufacturing and 
commerce require, of course, a far larger population 
on a given area than does any form of agriculture. 
Some regions are so undesirable as dwelling places 
that it takes an exceptional economic reward to induce 
men to live there. The static state is one in which, 
all these things being considered, there is no reason 
for changing the place of one's abode. This imphes 
more nearly equal density per unit of natural re- 
sources than equal density per unit of mere area. 
Inequality of advantage due to location is what 
is leveled out, and doing this does not require nor 
permit that population should everywhere be equally 
dense per square mile or per acre. 

Effect of Differences of Occupation. — Regions given 
over to agriculture naturally sustain more people 
than those devoted to grazing, and those which are 
devoted to manufacturing sustain more than either. 
In countries in which, as in Great Britain, manu- 
facturing is so disproportionately developed that 
products must be largely exported, while food must 
be largely imported, given areas sustain more in- 
habitants than they do in any agricultural or graz- 
ing region and more than they do in any region 
where grazing and tillage, on the one hand, and 
manufacturing, on the other, are well balanced. 
In mills and shops auxiliary capital so abounds as 
to take the place of the abundant land that is avail- 
able in the other cases for making labor fruitful, 
and in villages and cities labor does not overtax 
the resources of the soil any more than it does on 
farms. It has area enough to live and to work on 
and tools and materials enough to work with. In 
a generally crowded country, the resort to com- 



THE LIMITS OF AN ECONOMIC SOCIETY 217 

merce and manufacturing relieves the pressure on 
the land, cities abound, and an abundance of capital 
averts the danger of a disastrous overcrowding. 

An approximately Static Distribution of Popula- 
tion. — The apportionment of population among 
the different sections of a country may be nearly 
normal, while migration may still go on from that 
country as a whole to remote parts of the general 
area which we include in our present study. There 
may be small reason for moving from one part of 
Germany to another and large reason for going 
from Germany to America. This larger movement 
occupies a long time, while certain other adjust- 
ments may be made more quickly. Within Germany 
and within the United States labor may be well ap- 
portioned among the different occupations. There 
may be in each country about the right comparative 
numbers of cotton spinners, iron workers, gardeners, 
wheat raisers, etc. ; or in other words, the distribu- 
tion of labor among the industrial groups may be 
approximately normal both within the one country 
and within the other. It may further be true that 
the division of occupations between the two countries 
in their entirety is about what, in the conditions 
now prevailing, economic law calls for. There are 
certain industries which now have their habitats 
in Germany and certain others that have their 
habitats in the United States, and this arrangement 
is partly due to the comparative density of the two 
populations. Because there are so many persons 
per square mile of land in Germany there is 
there a certain preponderance of manufacturing, 
and there are in America less manufacturing and 
relatively more agriculture. In that remote time 



218 ESSENTIALS OF ECONOMIC THEORY 

when the relative density of the two populations 
shall become static, America will have reason to 
increase the comparative amount of the manu- 
facturing and thus put herself in this particular 
more nearly on a plane with Germany, This 
occupation has its normal abode in regions of com- 
paratively dense population, and a gain in com- 
parative density means an increase in the amount 
of productive energy devoted to it. The place for 
the mill is where the land is crowded, and the better 
place for the work of tillage is where it is not so.^ 

How an Unnatural Distribution of Population 
may he Treated. — So long as the slow movement 
of population from country to country remains 
incomplete, the ultimate division of occupations 
between the countries can never be completely 
static. It is therefore with a division that is only 
approximately static that we have first to deal, 
and this is realized when in view of the comparative 
density of population in the different regions which 
now exists occupations are naturally apportioned. 

The base line AD of this figure stands for the 
part of the world in which economic law works 
rapidly and encounters comparatively few obstruc- 
tions; and the extension of the line represents 
the lands outside of this region in which the laws 
are sluggish in their action. It is as though this 
base line were a section of a vast surface including 
both civilized and primitive states. AB represents 

' It will appear that manufacturing reacts on the deneity 
of population, first, by retarding emigration from the thickly 
populated country as a whole; and secondly, by causing 
local movements within the country, whereby cities and 
villages grow, and relieve what would otherwise be an excess 
of labor in agricultural regions. 



THE LIMITS OF AN ECONOMIC SOCIETY 



219 



the smallest population per unit of land of a given 
quality within the central area, and DC represents 
the largest, while the ascending line BC shows the 
gradations .of essential density in the peopling of 
different parts of it. At the point A the pressure 
of the population on the resources of the soil is 
least, while at the point D it is at its greatest. At 




the point A a man can get much out of the soil as 
the return for his own bare labor, while at D he can 
get comparatively little; and at intervening points 
on the base a man gets more than he does at D and 
less than he does at A. His gains measured in 
bushels of wheat, etc., vary inversely as the density 
of the population and so decrease from the left of 
the figure toward the right till the point D is reached. 
The occupations of the different localities are deter- 
mined by these facts. 

How Occupations vary with Differences of Land 
Crowding. — Crowding the arable land causes labor 
to flow naturally to manufacturing occupations 
since in these it is not so greatly handicapped in 
comparison with the labor of more sparsely peopled 
regions. In a cotton mill in Manchester. a man may 
contribute as many yards per day toward the prod- 
uct of the mill as he would in a mill in Fall River; 



220 ESSENTIALS OF ECONOMIC THEOKY 

but on an English farm one man's labor -does not 
create as much produce as it does on an American 
farm. The large amount of available land per man 
in America has a great effect on the amount that 
a man can produce by tilling it, but it has very 
little effect on the amount of the cotton goods that 
his presence and labor in the mill insure. In rais- 
ing crops, therefore, the Englishman is at a more 
serious disadvantage in comparison with the Ameri- 
can. The fact is expressed in a practical way by 
saying that the English labor is cheaper and is 
therefore more available for making things that 
are exported to the distant markets of the world 
than is labor of the same kind in America; but the 
reason for this cheapness is primarily the land crowd- 
ing, which reduces the productive power of a final 
unit of labor in the former country. Because the 
man cannot get for himself many bushels of wheat 
per annum by working on land he can afford to 
work in a mill at a rate corresponding with the 
value of the produce he could secure as a cultivator.^ 
General Differences between the Condition of 
Densely Peopled Regions and that of Sparsely Peopled 
Ones. — In a very general way it may be said that 
the comparative amount of manufacturing should 
naturally vary directly with density of population, 
and that the comparative amount of agriculture 
should vary inversely to it. In computing density 
due regard must, as has been indicated, be paid 
to the quality of the land as well as the area, since 
a number of inhabitants which would unduly con- 

* In this connection see the discussion of the principles 
of international trade in J. S. Mill's "Principles of Political 
Economy," Book III, Chapter XVI. 



THE LIMITS OF AN ECONOMIC SOCIETY 



221 



gest a sterile agricultural region can be well main- 
tained on a fertile one. In the accompanying 
figure the line AD inclosed by the vertical lines 
represents the part of the earth which we have 
called central, and the left side of it is the part of 
this area which has the sparsest population, while 
the right side is that which has the densest. The 
rising line BC 
represents the 
varying density 
of the popula- 
tion in different 
parts of the 
broad area we 
regard as gen- 
eral economic 
society, the 
dotted line EF 
may be taken as expressing the increase in the part 
of the labor and capital of the country devoted to 
manufacturing as population becomes denser, AE 
measures the proportionate number of persons en- 
gaged in manufacturing in the region of sparsest 
population, and DF measures the comparative num- 
ber in the region most densely peopled, 

AG and DH represent the numbers engaged in 
agriculture in the two regions, and the descent of 
the line GH represents the predominance of agri- 
culture in the sparsely populated part and the sub- 
ordination of it in the part that is densely populated. 
If we assume that capital in the different types of 
employment varies as does labor, the descent of this 
line toward the right means a decline in the fraction 
of the whole force of labor and of the whole fund 




222 ESSENTIALS OF ECONOMIC THEORY 

of capital devoted to cultivating the soil; while the 
upward trend of EF means the enlarging propor- 
tion of labor and capital devoted to manufacturing 
as we pass from a region of sparse population to 
regions more and more crowded. The wavy char- 
acter of the two dotted lines is designed to express 
the fact that local conditions other than mere den- 
sity of population favor the one type of occupation 
rather than the other; and moreover, nothing in 
the figure is intended to mean that the increase 
in manufacturing and the comparative decrease in 
tillage from the left of the diagram to the right are 
in any exact numerical proportion to the increase 
in the density of population. The figure as a whole 
rudely represents the fact that an approximation 
to the static distribution of population insures an 
approximation to a static apportionment of occu- 
pations within the described area and indicates 
the general nature of that apportionment. 

How Cost of Production and Cost of Acquisition are 
Equalized. — -The costs of moving goods* from place 
to place — including in these costs commercial charges 
and duties imposed by governments — are the cause 
of most of the manufacturing that is done in the region 
represented by the left side of the diagram, except 
the production of such articles for immediate or local 
consumption as are necessarily made at or near the 
places where they are used.^ Tailoring, blacksmith- 

^ There can be no large area from which manufacturing 
is excluded. The rural hamlet has its blacksmith, wheel- 
wright, and carpenter, its sawmills and gristmills; and 
manufacturers of sashes, doors, furniture, and many imple- 
ments abound where agriculture is the general industry. 
Special advantages for production insure the introduction 
of other industries, and the advantages of being near to cus- 



THE LIMITS OF AN ECONOMIC SOCIETY 223 

ing, carpentering, general repairing, etc., would 
always be done in that region, but many kinds of 
staple goods capable of being transported would, in 
the absence of duties on imports, be made chiefly 
in the region of dense population and cheap labor. 

The general rule for determining whether a branch 
of manufacturing can survive in the area of abundant 
land and well-paid labor is as follows: it can do so 
if the cost of making the article which this branch of 
business is devoted to producing is as low as the cost 
of acquiring it by exchange. The cost may in both 
cases be reduced to bare labor and the rule will then 
stand thus: if ten days' labor will make the article 
and if nine will make something that can be exchanged 
for it — i.e. if all the costs of the exchange can be 
covered and the thing can be brought from abroad 
for a total expenditure of nine days' labor instead of 
ten — the manufacturing of that article will not sur- 
vive. In a region of abundant land and well-paid 
labor it is chiefly the tolls which governments exact 
which make it as costly an operation to get the man- 
ufactured products by producing other things to bar- 
ter for them as it is to make them directly. Density 
of population, overworking of land, meagerness of 
returns to agricultural labor — these are the condi- 
tions that primarily fix the habitat of most kinds of 
manufacturing. In the case of particular products 

tomers is enough to maintain many of them. Repairing 
must, of course, be done everywhere, and in making some 
articles for local use it is best that the artisan should be 
where the customer can always reach him. A large cost of 
transportation favors local industries, a high degree of prod- 
uctivity in agriculture has an unfavorable influence, and a 
protective tariff on manufactures reduces the returns from 
agriculture and favors manufacturing industry. 



224 ESSENTIALS OF ECONOMIC THEORY 

these influences may be overcome by the presence 
in limited parts of the sparsely settled area of excep- 
tional natural advantages for production. Natural 
gas, special ores, particular kinds of lumber, etc., may 
draw some branches of manufacturing to the region 
of fertile land and high wages ; but as the compari- 
son which we are making is the most general one 
which it is possible to make we are safe in our asser- 
tion that, in the main, manufacturing processes tend, 
in the absence of exceptional influences, to con- 
centrate themselves in the region of dense population 
and of meager earning power of labor. 

The Approximate Static Adjustment of Prices. — 
In the main, and with tariffs as they are, the price 
of raw products is somewhat lower at the left of the 
figure, while that of highly wrought merchandise is 
markedly lower at the right of it ; and with the com- 
parative density of population as it is and with no 
change of commercial policy on the part of govern- 
ments, this condition may be expected to continue. 
It is an approximately static adjustment of prices. 
Purchasing manufactured goods in Europe will 
long be profitable if they can be passed duty free 
through the customhouse, while food will be some- 
what cheaper in America. 

Static Wages and Interest. — As has been said, the 
wages of labor are comparatively low at the right and 
high at the left of the figure, while interest varies in 
the two regions in the same way. It is lower in the 
crowded area. This is not because of the presence of 
many men, for this influence alone would tend to 
sustain the productive power of capital and the con- 
sequent rate of interest, and in fact the interest on 
capital in Europe would be lower than it is if the 



THE LIMITS OF AN ECONOMIC SOCIETY 



225 



population there were sparser. The rate which pre- 
vails is fixed by the productive power of a very large 
fund of artificial capital utilized by a large popula- 
tion meagerly- supplied with land. This last item is 
decisive in the case and is a primary cause of low 
interest. The full statement of these facts, made in 
graphic form, shows an ascending line of density of 
population, as we proceed from left to right, an 




ascending line of price for raw produce, a descending 
line of -price for highly wrought merchandise, and 
descending lines for wages and interest. All these 
lines represent the facts in a broadly general way. 
They deal with averages and not with particular 
rates. The labor whose earning power descends 
along the line numbered 5 is of many kinds, and the 
produce of which the average values vary along the 
lines numbered 2 and 4 is of many varieties. The 
rate of ascent or descent of the lines has no especial 
quantitative significance, and it is therefore not im- 
plied in the figure that wages decline more rapidly 
than the other factors. Moreover, it is such large 
areas as those of England, Germany, France, or the 
Mississippi Valley, including both cities and rural 



226 



ESSENTIALS OF ECONOMIC THEORY 



lands, that we have in mind when we speak of the 
density of population as ascending along the hne 
numbered 1. Anywhere we expect to find cities 
containing more persons to the acre than rural dis- 
tricts. The purpose of the figure is to enable us to 
take in at a glance five different adjustments that in 
the main are to be regarded as approximately static 
within the great region described as the economic 
center of the world. ^ 
Slow Change of the Foregoing Adjustments. — The 

line which repre- 
3 • ~S^ sents the com- 
parative density 
of population is 
of course slowly 
changing position 
as migration goes 
on from the older 
centers of popula- 
tion to more newly occupied regions. If the present 
distribution of population be represented by the line 
numbered 1, the distribution a hundred years hence 
may be represented by the dotted line numbered 2, 
and that which will exist after five hundred years 
shall have passed may be represented by the dotted 
line numbered 3. Even within the economic center 
the comparative density of population in different 
divisions is therefore not to be treated as strictly 

* The law of the distribution of occupations over the area 
represented by the diagram would, if it were more fully de- 
veloped, present an amplification of the law of International 
Trade stated in Mill's " Political Economy," according to which 
countries naturally produce, not only the things for the mak- 
ing of which they have the greatest absolute advantage, but 
those for which they have the greatest relative advantage. 




THE LIMITS OF AN ECONOMIC SOCIETY 227 

permanent, and it is not to be treated as in any sense 
permanent when we are forecasting effects that will 
be realized several centuries hence. For a problem 
involving a score or two of years the general conditions 
we have described may be treated as, in the main, 
abiding/ 

^ The reason for confining attention to the central zone is 
partly, as we have stated, because here only do we get a quick 
response to an economic influence. Overproduction of any 
article quickly lowers the value of it throughout the area, 
and a mass of unemployed laborers affects wages throughout 
the area more speedily than it does in the great environing 
zone. 

This, however, is only one reason for this limitation of the 
scope of our immediate study. A serious fact is that, if we 
include the entire world, we cannot establish, in the way we 
have proposed, the natural standards toward which values, 
wages, and interest are tending. It will be recalled that in 
the static division of this treatise we have attained a "natural" 
standard of wages by assuming that all dynamic changes 
were to cease and that labor and capital were to move to and 
fro in the system of industrial groups till each of these agents 
produced as much in one subgroup as in another. A com- 
putation of this kind might, within a limited area, be made 
periodically, say once in ten years, and if this were done it 
would give a series of static standards of wages. Now these 
standards become higher as time advances. The static rate 
of pay for labor is, as a rule, higher at any one date than was 
the standard for a date ten years earlier, and lower than will 
be that for a date ten years later. The normal rate of pay 
about which actual wages fluctuate is a rising one. 

Now, if we introduce in imagination an absolutely static 
state for the world at large, we shall have to assume that 
growth of the general population and increase of the aggre- 
gate capital both cease, and that inventions and new coor- 
dinations are no longer made. We must then wait long 
enough to allow static distribution of industries to be made 
over the whole world and to let each industry find its absolute 
habitat. This would involve causing methods of producing 
any commodity to be unified the world over. Hand labor 
in the Orient would have to give way to machine production, 



228 ESSENTIALS OF ECONOMIC THEORY 

as it has done in Western lands. For a strictly static ad- 
justment indeed even the density of population in the different 
sections would have to be brought to a virtual equality. 
While this nearly interminable process was going on, it would 
be needful that such dynamic changes as inventions and 
discoveries bring in their train should be absolutely precluded. 
Stop making new kinds of machinery and wait for centuries 
to allow a static adjustment to be made over the whole earth 
— such would be the order. 

Now, such a test as this would show falling wages in the 
more favored parts of the earth, whereas the facts show rising 
wages. The influx of population from the East, unrelieved 
by a corresponding influx of new capital and by more fruitful 
methods of production, would cause the earnings of an Ameri- 
can laborer to fall, and we should, on the basis of such a test, 
conclude that his wages in the long run are destined to be- 
come lower in consequence of the movement of the vast 
populations that now congest great Asiatic countries. We 
should have vitiated the problem by holding the growth of 
capital and the progress of invention in abeyance. This 
may be done within a limited area without giving a false 
result, because there adjustments are more rapid, and wait- 
ing for them does not involve the long-continued paralysis 
of the powers that make for greater wealth for laboring hu- 
manity. Apply the test of the static state to the economic 
center, and it will give a generally true result; but it wUl 
give a false one if it be applied to the world as a whole. The 
merely static adjustment of the world would take more cen- 
turies than we care to reckon, and no truth that we are seek- 
ing is revealed by assuming that for such a period the forces 
of progress are brought to a standstill. 



CHAPTER XIV 

EFFECTS OF DYNAMIC INFLUENCES WITHIN THE LIMITED 
ECONOMIC SOCIETY 

How the General Unification of Methods of Produc- 
tion Calls at First for an Increased Exportation of 
Capital from the Central Area and Checks the Immigra- 
tion of Laborers. — A study of the causes of the 
interchanges which take place between the economic 
center and its environment shows that the move- 
ment of goods, the diffusion of modern methods of 
making goods, and the movements of capital and 
labor across the border of the economic society we are 
studying are interdependent. Opening a field for a 
profitable export trade increases the productivity 
of labor at home and tends to attract immigra- 
tion. On the other hand, establishing in the outer 
zone a market for the products of the center pre- 
pares the way for introducing modern manufactures 
into the more densely peopled parts of the outer 
area. The company that sells cotton goods to the 
Chinese or the Hindoos will find that there is more 
to be made by utilizing the cheap labor of those 
peoples for making the goods by efficient machinery. 
Commerce tends to diffuse a knowledge of the most 
economical processes of manufacturing, and this inter- 
poses a certain stay on migrations of labor toward 
the center. It will in time help to retain Chinamen 
in China and Hindoos in India. It does, however, 
cause a movement of capital from the center outward, 

229 



230 ESSENTIALS OF ECONOMIC THEORY 

followed in time by a creation of wealth in the 
outer zone for proprietors residing within the center. 
The Englishman draws dividends from investments 
in many lands not within the field covered by the 
present studies. In so far as he reinvests them, as 
capital, in those lands, they supply a need that, 
without them, would have to be supphed by a new 
exportation of capital from the home country, and 
they therefore tend to check such exportation. In 
so far as the dividends are brought home they 
directly neutralize a certain amount of exportation 
of capital. 

Effects experienced within Economic Society from 
Interchanges with the Environing Area. — The intro- 
duction of improved methods of production within 
the central area usually calls for an expenditure of 
capital there, and this is largely furnished from the 
net profits from previous economies in production, 
and will, in its turn, furnish net profits that will con- 
vert themselves into the capital needed for applying 
future inventions. The study of the causes of an 
increase of capital, as well as of each of the generic 
changes that are going on within the center we defer 
for later chapters; but at present we need to know 
that the changes going on within what we define as 
economic society are affected by the intercourse 
which that society maintains with its environment. 
Immigration across the outer boundary of the gen- 
eral division enhances the rapidity of growth of the 
population within it, while emigration reduces it. 
Exporting capital in itself reduces the rate of accu- 
mulation at home, and importing increases it. Intro- 
ducing into foreign regions economical methods in use 
at home, modifies the trade which goes on between 



EFFECTS OF DYNAMIC INFLUENCES 231 

the great areas, and there is a perpetual rivalry be- 
tween the direct and the indirect process of obtaining 
goods at home. When a unit of labor can directly 
make more of A'" than it can procure by making A 
and exchanging it abroad for ^'", the manufacture 
of A'" is legitimate and profitable, but when the unit 
of labor can procure more of A'" by the indirect 
process in which an exchange with a foreign region 
intervenes, static law requires that this indirect pro- 
cess be resorted to. We should make A and buy 
A"' in order to get the most of the latter com- 
modity. This is the essence of the time-honored 
argument for freedom of trade, but the conclusion to 
which it leads is modified by a consideration of 
further dynamic influences which will, in due time, 
be presented. 

How we may get Valid Results hy Studying only a 
Part of the World. — It is entirely possible to study by 
themselves the activities of such a part of the world, 
and we will therefore draw a line of demarcation about 
the countries which constitute the economic center 
of it,. and thus include an area within which economic 
causes produce speedy effects. Each part of this area 
quickly responds to influences that originate in any 
other part. If the steel mills in America make rad- 
ical improvements in their machinery, this change 
should, in the absence of a strong monopoly, affect the 
price of rails in England, Germany, etc. Within the 
central region wages and interest tend toward uni- 
formity, though, as we have seen, they do not attain 
it. Across the boundary which separates this center 
from the outer zone, economic influences act in a more 
feeble way and are unable to bring rates of wages and 
interest even to an approximate equality. Western 



232 ESSENTIALS OF ECONOMIC THEORY 

Europe, America, and whatever regions are in very 
close connection with them, we treat as a society, 
with the remainder of the world as its environment. 
This center trades with the environing region, sends 
some capital and labor thither, and draws some of 
each thence to the home countries. Willingly or 
otherwise, it instructs the people of the outer region 
in modern methods of industry, and thus causes what 
we may regard as a slow annexation of a part of the 
outer zone to the economic center and a modification 
of the character of industries at home and abroad. 
The principal movement of labor is in an inward 
direction, and from our point of view it is immigra- 
tion not into one country merely but into all eco- 
nomic society. The predominant movement of 
capital has been outward. 

Mode of Studying Interchanges between Center and 
Environing Zone. — All these movements have to be 
recognized in a study of the economic life of the central 
society. How, for example, is commerce with unde- 
veloped regions to be regarded if we have the center 
only in view ? It is simply one of two possible ways 
of getting goods. The people of the center can make 
a commodity that they use, or they can make some- 
thing to send into the outlying countries in exchange 
for it. In the latter case they acquire it indirectly 
rather than directly, but they acquire it by their own 
industry in the one case as well as in the other. 

Natural Selection of Modes of procuring Usable 
Goods. — Under natural influences, as we have said, 
men select the most economical way to get what they 
use, or — what is the same thing — they select the 
mode of utilizing their own labor and capital that 
will give them the largest return in goods. There is 



EFFECTS OF DYNAMIC INFLUENCES 233 

competition between different methods of directly 
making goods, and the best method survives. The 
man with a good machine undersells the man with a 
poor one; this latter producer must improve his 
equipment, or fail, and appliances thus tend toward 
a maximum of efficiency. In like manner there is 
competition between the direct and the indirect mode 
of obtaining goods. The man who, by using a certain 
amount of labor for a week in making steel for exporta- 
tion, can obtain in exchange fifteen yards of silk, can 
undersell and drive from the field the man who, by 
using the same amount of labor for a week in silk 
making, can produce ten yards of silk. The importer 
naturally supplants the manufacturer when, by barter- 
ing with foreigners the product of a given amount of 
labor, he can get from them more than can be pro- 
duced at home by the same amount of labor. The 
manufacturers naturally survive when direct produc- 
tion gives the larger returns. In our studies of the 
economy of the society that is most advanced and 
central, we may treat whatever is imported as, in an 
indirect way, produced. In a sense the activities 
of that society are nearly self-contained since, by the 
direct or the indirect method, the people produce 
within their own boundaries the most of what they 
consume. In doing so they naturally use with a 
maximum of economy the forces at their command, 
and resort to traffic when that is profitable. 

Mode of Treating the Exportation of Capital. — 
Capital is moving across the boundary mainly in an 
outward direction. This fact, standing alone, would 
be equivalent to a mere retarding of the rate of 
increase of capital within the economic center; but 
the exported capital, as it is used outside of the 



234 ESSENTIALS OF ECONOMIC THEORY 

exporting society, produces an income for owners 
living within it. The income comes in kind, since it 
takes the form of goods which are an addition to 
those imported in the course of ordinary exchanges. 
This tribute paid to capitaHsts within the industrial 
center comes chiefly in the form of consumers' goods, 
the receiving of which does not entail the producing 
of something to send away in exchange for them. The 
material agent which creates the imported goods 
remains outside of the society, and sends its product 
into the society with no offset. The fact of such an 
income coming from beyond the pale of an economic 
society has compelled us to qualify the statement that 
the economy of the society is self-contained, for there 
is a small part of its income which is not created within 
its borders. This comes about by the exportation of 
capital and the importation of some of its products. 
Effects of Drawing Interest from Investments heyond 
the Social Boundary. — Not all of these are consumers' 
goods. Some capital goods are imported and, more- 
over, many consumers' goods are passed over to the 
group called HH'" in our table, — the one that 
makes active instruments of production, — and in this 
indirect way the earnings of capital invested abroad 
add to the amount of capital at home. In the long 
run the exportation of funds for permanent invest- 
ment may, by its other and more indirect effects, 
increase the supply of them at home.- The literal 
fact in each year is that what is exported is itself a 
reduction of the amount that would otherwise be 
added to the home supply, but that the income accru- 
ing from what has been exported in earlier years makes 
an addition to what is in this year accumulated at 
home. Primarily, the exportation of capital is to 



EFFECTS OF DYNAMIC INFLUENCES 235 

be treated as causing a modification of the rate of 
accumulation of capital and, in a long term of years, 
an increase of the rate. 

Movements of. Labor. — Laborers cross the boundary 
in both directions, but inducements favor the inward 
movement. In the absence of positive obstacles 
the denser populations of Asia could overflow into 
America with a startling rapidity. Such a move- 
ment, on whatever scale it occurs, is to be treated 
as causing an acceleration of the rate of increase of 
the population within the center. Whatever results 
arise from growth of population within are empha- 
sized by immigration. 

The Assimilation of Economic Methods and Forms 
of Organization. — People without the center are 
borrowing from it the newer and more efficient 
methods of production. Already Asiatics are mak- 
ing some things by machinery, and when they shall 
do it more generally there will take place changes that 
will be very revolutionary in their own economic 
life and will react on the life of the center itself. 
Learning to use a thousand and one machines will 
rend China and disturb Europe and America. In 
general, better appliances and a more efficient organi- 
zation will make it possible for Asia to create for 
herself, and ultimately export much that she now 
imports, and this will react on the character of the 
industries of America and Europe. We shall some- 
what modify our industries in order to get the benefit 
of new openings for commerce, and some of the things 
which we now directly produce we may find it more 
profitable to get by exchange, which is indirect pro- 
duction. On the other hand, some foreign products 
which we now get with great economy of labor, be- 



236 ESSENTIALS OF ECONOMIC THEORY 

cause the goods we exchange for them are scarce and 
dear in the countries that receive them, we shall get 
on less favorable terms, because the goods we now 
send to the foreign lands will have become there more 
abundant and cheap. In general, we must regard 
the opening of a profitable avenue for trade as we 
should the invention of a new machine, the discovery 
of a better electrical transmitter, or the utilizing of 
a cheaper motive power. It gives us more goods as 
the fruit of a given expenditure of labor and capital 
and affords a profit which, as we shall see, comes 
first to entrepreneurs and later to laborers and capital- 
ists within the pale. Ultimately, those living beyond 
the pale will get a share of this gain. 

Summary of Facts concerning the Economic Center. 
— We may, then, regard a certain limited part of the 
world as a society in itself. It is modified by its 
environment, but, in an important sense, it has a 
self-contained hfe. The economic changes which 
go on within it can be grouped under the five generic 
heads: increase in the amount of labor, increase in 
the quantity of capital, improvement of method, 
improvement in organization, and changes in the 
wants of the individual consumers. 

The Geographical Boundaries of Society not Fixed. — 
The boundaries of this central area are not fixed. 
As relations between the center and the part of the 
outer zone which is nearest to it become more and 
more intimate, the adjacent region takes on the char- 
acter of the center. It is, in an economic way, as- 
similated to it; and in this way the center may be 
regarded as annexing to itself belt a^ter belt of the 
environing world. Ultimately it will doubtless annex 
the whole of it ; and for this reason, even though we 



EFFECTS OF DYNAMIC INFLUENCES 237 

confine our studies to the center, we shall establish 
a system of economic laws which will apply, in the 
end, to all the world. This indeed is not the only 
way in which the economic life of the outer area 
comes into the economist's purview, for he can study 
it for itself. This zone has its peculiar life, which is 
a distant reflection of the Hfe of the center. It is a 
type of economic activity in which all the primary 
forces work, but in which friction abounds and adjust- 
ments are made with extreme slowness. For the 
present, what interests us is the life of the center itself, 
and in studying this we take account of the influence 
of the environment. The effects of these influences 
are first seen in changes in the rate at which the five 
general dynamic movements go on within the center. 
The grand resultant is more rapid progress within the 
center. 

What is involved in a Full Study of the Relative 
Density of Populations. — A full treatment of the 
subject of the comparative density of population in 
different places would include an extended study of 
the kinds of industry which find their natural homes 
in densely peopled countries and of those which 
flourish in sparsely peopled ones, and a much more 
detailed tracing than it is possible here to undertake 
of those changes in the character of industries every- 
where which result from a leveling out of differences 
in population. Clearly, if all America were to be- 
come as crowded with inhabitants as are Holland and 
Belgium we should develop industries of a different 
type from those that we now have, and the change 
would be in the direction of producing relatively more 
form utilities and relatively less of the elementary 
utihties. Labor and capital would move from the 



238 ESSENTIALS OF ECONOMIC THEORY 

subgroups which in our table we have called A, B, 
and C toward A'" , B'" , and C". We should spend 
more of our energy in making finished goods and less 
in getting raw materials. I shall note in a very gen- 
eral way the changes in social industry caused by in- 
crease of population without looking forward to that 
remote time when the density of population shall be 
equalized. 

Why an Approximately Static Adjustment of In- 
dustries within the Central Area permits Unequal 
Density of Population in Different Parts of It. — We 
exclude from view the ultimate static adjustment of 
the whole world, and content ourselves with an ap- 
proximate adjustment within society as we have 
defined it. Even within this limit there are inequal- 
ities in the density of population which it would re- 
quire a very long time to remove, and a perfectly 
static state cannot be reached till they are leveled 
out. The selection of industries in Texas and in 
Belgium cannot be, in the ultimate sense, natural till 
population in these two regions is so adjusted that 
there is no longer an economic motive for migrating 
from the one to the other. If, in order to determine 
what an absolutely static condition for the central 
society would be, we were to apply the rule of imag- 
ining all new dynamic influences precluded and of 
allowing time enough to elapse to bring about a 
normal apportionment of population within that 
limited area, we should encounter a measure of the 
same difficulty which confronted us when we proposed 
to attain a similar static state for the entire world, 
though the trouble would be less serious in degree. 
In waiting long enough for population to distribute 
itself naturally, we cut off influences that, within 



EFFECTS OF DYNAMIC INFLUENCES 239 

that period, will affect production and distribution far 
more than the change in population will affect them. 
In so far as Texas or any newly occupied region is 
concerned, the- changes thus precluded are those which 
would have tended to reverse the effect of the redis- 
tribution of population. Migrations from Belgium 
to Texas, if extensive and long continued, would 
reduce the productive power of labor in Texas ; while 
the dynamic changes which will actually go on within 
any such period will increase the productive power of 
that labor, and it is not certain whether the one or 
the other influence will predominate. For the United 
States as a whole it is probable that progress in the 
useful arts will more than offset the influx of new 
laborers and give to wages a rising trend. If, how- 
ever, we establish the natural standard of wages 
by cutting off such progress and letting the influx 
of labor continue, the test would give a standard 
lower than the present one, — a false, as well as a 
discouraging result. The resultant of all the changes 
we are about to study will probably give to the future 
pay of labor in America a rising trend. 

How Industries adapt themselves to Unequal 
Density of Population. — In view of this fact it is 
necessary to recognize a proximate rather than an 
ultimate static state as that toward which the adjust- 
ments now going on are immediately tending. We 
will treat the unequal density of population within 
our economic society as something which will last, not 
forever, but so long that it will not be removed or 
appreciably affected within the period required for 
the other adjustments that we are studying. Given 
a population that is dense in Belgium and sparse in 
Texas, and competition will cause the industries to 



240 



ESSENTIALS OF ECONOMIC THEORY 




take on the types which they would have and retain 
if that difference in density were destined to be 
permanent. The type toward which the economic 
hfe of both regions is tending is thus a proximate 
rather than an ultimate one. Each region will, in 
the near future, be of the type toward which influ- 
ences which do not involve an equalization of popu- 
lation are impelling it. 
D We get the true direc- 

tion of the change that 
is going on in the earn- 
ing power of labor and 
in the shape of the in- 
dustrial organism in 
both regions by recog- 
nizing the fact that the differences in the density of 
their populations will continue through the period 
which we are considering. 

If the line BC represents the productive power of 
a unit of labor in a region which is sparsely peopled, 
and the line B'C represents the productive power of 
a unit of labor in a densely peopled region, we may 
assume that AC and A'C, which are equal to each 
other, represent the product of a unit in either locality 
when, general progress being precluded, the differ- 
ence in the density of population should have been 
leveled out. Move people at once and in a wholesale 
manner till there is nothing to be gained by further 
moving them, — let pressure of population on the 
land be fully equalized,- — and you may be supposed 
to create a condition of uniform productive power for 
laborers of a given grade in the entire region. The 
horizontal line AA\ which is everywhere the same 
distance above the line CC, represents the universal 



EFFECTS OF DYNAMIC INFLUENCES 241 

level of the productivity of labor in such a theoretical 
condition. The line BB' represents the actual and 
different levels of the natural earnings of labor in 
the different. regions. Assuming that all other static 
adjustments are made, but that the equalization of 
population has not taken place, labor will earn the 
amount BC in one place and the amount B'C in 
another. Somewhere it will earn an amount repre- 
sented by the vertical line descending from D and 
somewhere that expressed by the line descending 
from F, while there will be places where the earnings 
of labor are measured by the line descending from E, 
which is the amount that labor would everywhere 
create and get if the population could be quickly 
made normal in all regions. The standard of wages 
for the whole of the great region, largely European 
and American, which constitutes the economic center 
of the world, shows varying levels in different coun- 
tries and parts of countries, and the actual rates in 
every place fluctuate about this proximately normal 
standard for that place, the standard rate in one 
locality being higher than that of another. 

The line A'B' exceeds in length the line AB, and 
this expresses the fact that equalizing the pressure 
of population on the land in different regions adds 
more to the productivity of labor in the region now 
crowded than it deducts from that of labor in regions 
now sparsely peopled. The overcrowding does greater 
and greater harm the further it is carried, and there- 
fore taking away a surplus of people from a region 
which has suffered greatly from overcrowding affords 
a relief which more than offsets what is lost in other 
places by a moderate increase of population. More- 
over, the fact has to be recognized that at present 



242 



ESSENTIALS OP ECONOMIC THEORY 




there are ten square miles of sparse population for 
one that is very densely peopled, and reducing all to 
an equality would add only slightly to the number 
of inhabitants of the regions that now contain few 
of them.^ 

If the line BB' represents the unequal level of 

natural wages in 
different localities, 
on the assumption 
that populations re- 
main unequal, the 
undulating curve 
DD' which crosses 
and recrosses the 
line BB' represents 
actual local rates fluctuating about the standard 
ones. 

How a Static Adjustment for the World is a Dynamic 
Influence within a Limited Part of It. — Commodities 
are, by traffic, crossing the social boundary in both 
directions, and with the goods there go and come 
influences that affect the economic life of the central 
society. Methods and modes of organizing business 
are taught by each region to the other, though most 
of the teaching is done by the people of the center and 
most of the learning by those of the environment. 
All this affects the center and falls within our study. 
It has dynamic effects within the center, though it is 
only a part of a static adjustment for the world as 
a whole. If the grand bank of Newfoundland were 



1 Exceptional local conditions may make an influx of popu- 
lation for a time a cause of greater productivity rather than 
of less. The general and permanent effects are otherwise, 
and it is on these that the present argument rests. 



EFFECTS OF DYNAMIC INFLUENCES 243 

to subside to the level of the middle of the Atlantic, 
there would be a great rush of water toward the 
place that the banks now occupy, but this would be 
only what is required in bringing the general level 
of the sea to an equilibrium. It would be essentially 
a static phenomenon, but for the region of the banks 
it would be dynamic in the highest degree. A rush 
of population from China to America would be a 
change tending to establish an equilibrium of popula- 
tion in the world, but it would be a startling bit of 
dynamics for America. Teaching the Chinese all 
the mechanical arts that we know would be creating 
an equilibrium of another sort, in which methods 
would be similar in the two countries ; but for China 
itself this acquiring of practical arts would be dynam- 
ics acting on a vast scale. What is a static adjust- 
ment for the world is a dynamic change for parts of 
the world, and all such changes that can occur within 
the area of economic society proper and within the 
period we can wisely include in our study we need to 
take into account. Changes in population, wealth, 
method, and organization must be studied, however 
they may originate. 



CHAPTER XV 

PERPETUAL CHANGE OF THE SOCIAL STRUCTURE 

Perpetual Change of the Social Structure. — We con- 
fine ourselves to that economic society par excellence 
which we have called the industrial center of the 
world. In this region economic influences are for- 
ever changing the very structure of the society itself. 
They move labor from place to place in the system 
and they transfer capital to and fro in the same way. 
If we think of our table of groups and subgroups as 
representing the whole of this great industrial world, 
we must think of labor and capital as in a perpetual 
-flow from subgroup to subgroup, making some in- 
dustries larger and others smaller by reason of every 
such movement. The great force of labor and the 
fund of capital are like restless seas whose currents 
carry the water composing them now hither and now 
yon as the direction and force of the moving influ- 
ences change. 

Movements of Labor within the Group System 
caused by Increasing Population. — If the population 
were to increase while the amount of capital and the 
mode of using it remained the same, the effect would 
be a downward movement of both labor and capital 
in the series of subgroups by which we represent 
industrial society. Labor and capital would tend to 
desert the subgroups A^'', B"\ and C"' in our table 
and to move to A, B, and C : — 

244 



PERPETUAL CHANGE OF SOCIAL STRUCTURE 245 



^,„ 


B'" 


G'" 


A" 


B" 


0'' 


A' 


B' 


G' 


A 


B 


G 



Gauses of Downward Flow of Labor in the Group 
System. — A larger population means, of course, not 
merely an increase in the amount of labor performed, 
but also an increase in the number of consumers. 
It means more mouths to feed and more bodies to 
clothe. It entails also, according to principles that 
we have already studied, a lower earning power and 
a lower rate of pay for labor. This means that simple 
food, cheap clothing, inexpensive houses, furnishings, 
etc., constitute a larger element in the consumers' 
wealth of society than they have heretefore done. 
Society uses fewer luxuries and more necessaries, 
and the necessaries of life are products in which raw 
materials predominate and costly form utilities are 
wanting. This makes a heavier draft upon the land 
than does ttfe production of highly wrought articles 
of the same value. 

Luxurious articles are fashioned with a great 
amount of artisan's or artist's labor and a relatively 
small amount of the labor of cultivators and miners. 
The subgroups A, B, and C are the ones that furnish 
the rawest materials, and it is they, therefore, that 
receive the largest portions of the new labor that 
enters the field. 

How Economic Friction works to the Disadvantage 
of Immigrants. — Unless capital grows more rapidly 
than population, there is a certain friction to be over- 
come in obtaining places for new laborers. If they 
come largely as immigrants, they are crowded at the 
points of disembarkation and are then scattered over 



246 ESSENTIALS OF ECONOMIC THEORY 

a large territory. They may have to gain employ- 
ment by offering to entrepreneurs some inducement 
to take them. If capital has not increased, and the 
entrepreneurs are in no special need of new men, they 
will take them only at a rate of pay which is low 
enough to afford of itself a slight margin of profit. 
If the capital has already grown larger and the new 
men are needed, the situation favors them, and their 
pay is hkely to be as high as it was before, or higher. 

The Effect of Increasing Capital. — The growth of 
capital has an opposite effect. It means a lower rate 
of interest, though it means more interest in the 
aggregate, since it insures a larger fund on which 
the interest is received. The rate does not decline 
as rapidly as the amount of the fund increases, and 
this insures a larger gross income from the fund; 
and it also insures larger individual incomes for many 
persons. There is, then, a large number of people 
who are in a position to make their consumption more 
luxurious, and this causes an upward movement of 
labor and capital in the group system. More workers 
will be needed in the subgroups A'", B'", and C", 
where raw materials receive the finishing touches, 
and also in the other subgroups above the lowest 
tier. It is to these subgroups that a large portion 
of the new capital itself will come, and the labor will 
come with it. Larger incomes, more luxury, more 
labor spent in elaborating goods as compared with 
that required for procuring crude materials, — such 
is the order. 

Effect of an Increase of Both Labor and Capital. — 
It is clear that a certain increase of capital might 
practically neutralize the increase of population, in 
so far as the movements thus far considered are con- 



PERPETUAL CHANGE OF SOCIAL STRUCTURE 247 

cerned, and a greater increase of capital would re- 
verse the original downward movement caused by the 
increase of labor and result in a permanent upward 
movement toward the subgroups A'" , B'" , and C" . 
In this case the men occupy themselves more and 
more in making the higher form utilities. They make 
finer clothing, costlier furniture, etc., and the new 
production requires proportionately less raw material 
than did the old. This is the supposition which cor- 
responds to the actual facts. Capital is increasing 
faster than labor, and consumption is growing rela- 
tively more luxurious; dwellings, furnishings, equi- 
page, clothing, and food are improving in quality 
more than they are increasing in quantity. Goods of 
high cost are-predominating more and more, and the 
subgroups that produce them are getting larger shares 
of both labor and capital. Population drifts locally 
toward centers of manufacturing and commerce. It 
moves toward cities and villages in order to get into 
the subgroups which have there their principal 
abodes. The growth of cities is the visible sign of an 
upward movement of labor in the subgroup series. 

A Change in the Relative Size of General Groups. — 
If all the steady movements of labor and capital were 
stated, it would appear that a relative increase in the 
amount of labor, as compared with the amount of 
capital, would enlarge the three general groups, AA''\ 
BB'" , and CC'" , and reduce the comparative size of 
the general group HW", which maintains the fund of 
capital by making good the waste of active instru- 
ments. Gain in capital estimated per capita would 
cause relatively more of the labor and more of the 
fund of capital to betake itself to the group HH'". 
The movement toward the upper subgroups which is 



248 ESSENTIALS OF ECONOMIC THEOEY 

actually going on is attended by a drift toward this 
general group. An increase of luxurious consumption 
and an enlargement of the permanent stock of capital 
goods go together. ' 

Regularity and Slowness of Movements caused by 
Changes in the Amounts of Labor and Capital. — The 
important fact about the movements thus far traced 
is that they are steady and slow. They do not often 
call for taking out of one part of the system mature 
men who have been trained to work there. They are 
movements of labor which do not, in the main, involve 
any considerable moving of laborers from group to 
group. The sons of the men in the subgroup A do not 
all succeed to their fathers' occupations, but many 
of them enter A', A", and A'", so that- labor moves 
from the lowest subgroup to higher ones. Such a 
transfer of labor entails few hardships for any one, 
and in general it is to be said that all the movements 
of labor and capital which are occasioned by quanti- 
tative changes in the supply of these agents are of 
this comparatively painless and frictionless kind. 
About changes caused by new methods of production 
there is a different story to tell. The transforma- 
tion of the world does not go on without some dis- 
quieting results, however inspiring is the remote 
outlook which they afford. The irregularity of the 
general movement, the fact that it goes by forward 
impulses followed by partial halts, is a further seri- 
ous fact. Hard times present their grave problems, 
and we need to know whether it is necessary that 
dynamics — the natural and forward movement of 
the industrial system — should produce them. This 
problem is for later consideration. 

Movements caused by Changes in the Processes of 



PERPETUAL CHANGE OF SOCIAL STRUCTURE 249 

Production. — Mechanical inventions are typical mov- 
ers of labor and capital — constant disturbers of what 
would otherwise be a comparatively tranquil state. 
Dynamos for- generating electricity and devices for 
conducting it to great distances from its sources have 
done much to rearrange the society of a score of years 
ago, as economical steam engines had done at an 
earlier date. Every device that "saves labor" calls 
for a rearrangement of labor in the system of organized 
industry. 

In a perfectly static condition there would be, as 
we have seen, a standard shape for all society, which 
means a normal apportionment of labor and capital 
among the producing groups and subgroups and also 
among the local divisions of the general area. The 
elements would subside to a state of equilibrium and 
become motionless, as water finds its level and be- 
comes still in a sheltered pool. The body of fluid 
takes its standard shape and retains it, so long as no 
disturbing force appears. Now, society would have 
such a standard shape and would require, in the ab- 
sence of dynamic changes, a relatively short time in 
order to conform more or less closely to it, if it were 
not for the unnatural apportionment of population 
in different parts of the area that the society inhabits 
and the obstacles which wholesale migrations en- 
counter. For the solution of problems of the present 
and the near future we must accept as a standard the 
quasi-static adjustment of the population and the 
consequent quasi-static selection of industries in the 
different local divisions of the broad area — the ar- 
rangement that we have described as locating an ex- 
cess of manufacturing in the more densely peopled 
areas and an excess of agriculture in the more sparsely 



250 ESSENTIALS OF ECONOMIC THEORY 

settled ones. With this quahfication it may be said 
that there is a standard apportionment of labor and 
capital among the producing groups, and that these 
agents gravitate powerfully and even rapidly toward 
it. If there were a certain amount of labor and cap- 
ital at A, a certain amount at B, and so throughout 
the system, this standard shape would be attained, 
and the elements would not move, except as a very 
slow movement would be caused by changes in the 
comparative density of population of different 
regions.^ This standard shape would long remain 
nearly fixed if it were not for the appearance of the 
dynamic influences which are so active within the 
area we are studying. 

Alternations in the Direction of Movements caused 
by Improved Methods. — In a dynamic state this 
standard shape itself — the approximately static one 
— is forever changing. At one time, for example, 
conditions exist which call for a certain amount of 
labor at A, another amount at B, etc. A little later 
these respective quantities at ^, J5, etc., are no longer 
the natural or standard quantities; for something 
has occurred that calls for less labor at A, more at B, 
etc. If A represents wheat farming, the amount of 
labor that it required when grain was gathered with 
sickles is more than is necessary when it is gathered 
with self-binding reapers, always provided that 

* It is obvious that capital as well as population is dis- 
tributed with uneven density over the territory occupied 
by society; but the movement of capital is less obstructed 
than that of a great body of people, and moreover it is chiefly 
the fact that the people are not dispersed over the area in 
a natural way which creates the chief obstacle to the moving 
of capital. It goes easily when it accompanies a migration 
of laborers. 



PERPETUAL CHANGE OF SOCIAL STRUCTURE 251 

there has been no increase in population, which 
would require an increase in the food supply. The 
society therefore will not be in what has now become 
its standard shape till men have been moved from the 
wheat-raising subgroup to others. 

If the invention of the reaper were not followed by 
any others and if no other disturbing changes took 
place, labor would move from the one group, distribute 
itself among others, and bring the system to a new 
equilibrium ; but it has not time to do this. It begins 
to move in the way that the new condition occasioned 
by the introduction of the reaping machine impels 
it to move ; but before the transfer is at all complete 
there is a new invention somewhere else in the system 
that starts a movement in some other direction. Be- 
fore the labor from A is duly distributed in B, C, etc., 
there is an invention in B which starts some of it ' 
toward other points. 

Why Movements are Perpetual as well as Changeful. 
— Such improvements are perpetual, and the dy- 
namic - society is not for an instant at rest. If the 
disturbing causes would cease, the elements of the 
social body would find their abiding place ; and the 
important fact is that at any one instant there is such 
a resting place for each laborer and each bit of capital 
in the whole system. As we have seen, the men and 
the productive funds would go to these points but 
for the fact that before they have time to reach them 
new disturbances occur that call them in new direc- 
tions. Again and again the same thing occurs, and 
there is no opportunity for placing labor and capital 
at exactly the points to which recent changes call 
them before still further improvements begin to call 
them elsewhere. 



252 ESSENTIALS OF ECONOMIC THEORY 

Why Technical Changes are more disturbing than 
a General Influx or Efflux of Population. — When the 
moving of labor is gradual, it is effected, not so much 
by transferring particular men from one occupation 
to another, as by diverting the young men who are 
about entering the field of employment to the places 
where labor is most needed. When the son of a 
shoemaker, instead of learning his father's trade, 
becomes a carpenter, no laborer has abandoned an 
accustomed occupation and betaken himself to 
another; but labor has gone from the shoemaking 
trade to that of carpentering. A man often stays 
where he is to the end of his life, although during that 
life labor has moved freely out of his occupation to 
others. If we represent the facts by a diagram, they 
will stand thus : — 

A B C D 

50 40 70 1 00 Natural and actual apportionment of 
labor in 1850. 

Natural apportionment after change 
of method in 1850. 

Apportionment in 1855 when the 
movement initiated in 1850 is 
partially completed. 

Natural apportionment in 1855, with 
movements then initiated. 

A, B, C, and D represent different occupations or 
subgroups in the table we have before used. At one 
date a static adjustment called for fifty units of labor 
at A, forty at B, seventy at C, and one hundred at D. 
A half decade later, after improvements had taken 
place qX A,B, and D, static forces, if they were allowed 
to have their full effect, would leave only forty-five 
men at A, and thirty-five at B, but they would place 



45^^ 


35>- 


->90 


^90 


47 


38 


80 


95 


52 


^1^. 


_65 


102 



PERPETUAL CHANGE OF SOCIAL STRUCTURE 253 

ninety at C and at D. The first movements that 
would tend to bring this about are in the direction 
indicated by the dotted Hues. The transfers are 
made, not by forcing men from A, B, and D to C, 
but chiefly by diverting to C young laborers who 
would otherwise have gone to A, B, and D to re- 
place men who are leaving in these groups. 

Now, before the transfers are completed something 
happens that calls for a different movement. Let 
us say that only three units of labor have as yet gone 
from A to C instead of five, leaving forty-seven at A ; 
only two have gone from B, leaving thirty-eight ; and 
only five have gone from D, leaving ninety-five at 
that point. Eighty would then be at C, and the static 
adjustment would not have been perfectly attained. 
It is at this point that a new change of conditions oc- 
curs, which calls for fifty-two units at A, forty-one at 
B, sixty-five at C, and a hundred and two at D. C 
now contributes something to A and B, but it gives 
more to D ; and the fluctuations go on forever. Par- 
ticular men may, more often than otherwise, stay in 
their places, since the incoming stream of new labor, 
by going where it is needed, may suffice to make the 
adjustments, in so far as they are gradually made ; 
but labor, in the sense of the quantum of energy em- 
bodied in a succession of generations of men, is never 
at rest. It is a veritable Wandering Jew for restless- 
ness and in a perpetual quest of places where it can 
remain. Moreover, there are to be taken into account 
changes so sudden that they thrust particular workers 
from one group to another. 

A Perpetual Effort to conform to a Standard Shape 
which is itself Changing. — We think, then, of society 
as striving toward an endless series of ideal shapes, 



254 ESSENTIALS OP ECONOMIC THEORY 

never reaching any one of them and never holding 
for any length of time any one actual shape. One 
movement is not completed before another begins, and 
at no one time is the labor apportioned among the 
groups exactly in the proportions that static law calls 
for. Men are vitally interested to know what they 
have to hope for or to fear from this perpetual neces- 
sity that some labor should move from point to point. 

Questions concerning the Effects of these Transfor- 
mations. — These changes of shape involve costs as 
well as benefits. The gains are permanent and the 
costs are transient, but are not for that reason un- 
important. They may fall on persons who do not get 
the full measure of the offsetting gains. What we 
wish to know about any economic change is how it 
will affect humanity, and especially working human- 
ity. Will it make laboring men better off or worse 
off? If it benefits them in the end, will it impose 
on them an immediate hardship ? Will it even make 
certain ones pay heavily for a gain that is shared by 
all classes? Are there some who are thus the espe- 
cial martyrs of progress, suffering for the general good ? 

Natural Transformations of Society increase its 
Productive Power. — There is no doubt that the 
changes of shape through which the social organism 
is going cause it to grow in strength and . efficiency. 
More and more power to produce is coming, as we 
have seen, in consequence of these transmutations. 
They always involve shifting labor about within the 
organization and often involve shifting laborers, tak- 
ing some of them out of the subgroups in which they 
are now working and putting them into others, some- 
thing that cannot be done without cost. 

Immediate Effects of Labor Saving. — Inventing a 



PERPETUAL CHANGE OF SOCIAL STRUCTURE 255 

machine that can do the work of twenty men will 
cause some of the twenty to be discharged. They 
feel the burden of finding new places, and if they are 
skilled workmen and their trade is no longer worth 
practicing, they lose all the advantage they have en- 
joyed from special skill in their occupations. Do 
they themselves get any adequate offset for this, or 
does society as a whole divide the benefit in such a way 
that those who pay nearly the whole cost get only their 
minute part of the gain ? Is there unfair dealing in- 
herent in progress in the economic arts, and must we 
justify the movement only on the ground of utility, 
though knowing that a moralist would condemn it? 
These are some of the general questions that are to be 
decided by a study of this phase of economic dynam- 
ics. We need to know both what the movement will 
in the end do for humanity and what it will at once 
do for particular workmen.^ In addition to ascer- 
taining what the ultimate results of the movement 
will be, we need to trace, with as much accuracy as 
is possible, the effects of the disturbances that are 
involved in generally beneficent changes. 

* Our study may lead to a moral verdict without being 
itself an ethical study; we limit the inquiry to questions 
of fact, but perceive that some of the facts are of such a kind 
that they must lead a reader to condemn or approve the 
social economic system. 



CHAPTER XVI 

EFFECT OF IMPROVEMENTS IN METHODS OF PRODUCTION 

Displacement of Labor and Capital by Inventions. — 
Inventions are "labor-saving." Employers are en- 
gaged in a race with each other in reducing the out- 
lays involved in producing goods, and a common 
way of doing this is to devise machinery that will 
do what laborers have heretofore done. The same 
thing is accomplished by developing cheap sources of 
motive power or introducing new commodities which 
are good substitutes for dearer ones. . Mechanical 
automata have at a thousand points taken labor out 
of human hands; electricity, which is "harnessing 
Niagara," may at some time harness waves and winds 
and make them turn the literal wheels of mechanical 
progress. Such things, by causing a given amount 
of labor to produce a larger amount of consumers' 
wealth, are product multipliers; but this is the same 
thing as saying that they yield a given product at the 
cost of less labor, and as we more commonly see 
their effect in this light, we call them labor savers. 

Why Labor Saving is not always and everywhere 
Welcomed. — To an offhand view it would seem that 
product multiplying is the greatest blessing that, in 
an economic way, can come to humanity; and if 
general and permanent effects be considered, it is so. 
The solitary hunter who has to catch and club his 
game would get unqualified benefit from the possession 
of a bow and arrows; the fisherman would get the 

256 



IMPROVEMENTS IN METHODS 257 

same benefit from a canoe, the cultivator of the soil 
from a spade, etc. Society in its entirety is an iso- 
lated being and derives similar gains from engines, 
looms, furnaces, steamships, railroads, telegraphs, 
etc. Yet there are persons within the great social 
organism to whom the benefit from one special im- 
provement may be small and the cost great. There 
are none who are not better off because of all improve- 
ments past and present. 

The General Demand for Labor not Lessened. — It is 
a matter of common experience that new machines 
are labor displacers. At its introduction an econom- 
ical device often forces some men to seek new occupa- 
tions, but it never reduces the general demand for 
labor. As progress closes one field of employment 
it opens others, and it has come about that after a 
century and a quarter of brilliant invention and of 
rapid and general substitution of machine work for 
hand work, there is no larger proportion of the labor- 
ing population in idleness now than there was at the 
beginning of the period. 

A Voluntary Reduction of Toil Desirable and Prob- 
able. — A full study of the effects of technical prog- 
ress will show that there is never a reduction of the 
general field for employment in consequence of it. 
There is an increase of pay, and this causes a certain 
unwillingness to work for as many hours as men 
formerly worked; and there is also a change in the 
nature of the operations that labor performs, which 
tends in the direction of more comfort and less painful 
toil. For the famous statement of J. S. Mill that "It 
is questionable if all the mechanical inventions yet 
made have lightened the day's toil of any human 
being" we may safely substitute, "It is the natural 



258 ESSENTIALS OF ECONOMIC THEORY 

tendency of useful inventions to lighten the toil 
of workers and to give them, withal, a greater reward 
for their work." Mechanical progress is the largest 
single ground for hope for the future of laboring hu- 
manity, and by its effects, direct and indirect, it has 
already insured a great alleviation of toil, with an 
increase in its rewards. It has helped to counteract 
the world crowding that for a century has gone on and 
the diminishing returns from agriculture which the 
crowding entails. Inventions may make disturb- 
ances, and their better effects may be temporarily 
and locally counteracted; but a society where com- 
petition rules is sure to secure the benefits in the end 
and does, in fact, secure them in greater and greater 
measure as the years go by. Such are some of the 
theses which research will justify. 

Facts concerning Disturbances incidental to Prog- 
ress. — We have first to take account of the disturb- 
ances. They are prominent in economic discussion 
and constitute the subject of one of the grave indict- 
ments brought against the system of competitive 
industry. They have actually caused great hardships 
in the past, as skilled handicraftsmen have seen 
machines come into use which, for rapidity and 
accuracy of work, excel the best results that long 
apprenticeships formerly gave. Now that machinery 
has possession of most of the field, there is no longer 
the former opportunity for displacing hand workers ; 
but the remainder of hardships incidental to progress 
is not to be overlooked. This part of the dynamic 
movement involves present local sacrifices for the 
sake of future general gains. Here, therefore, there 
are developed antagonisms of interest which may 
hinder progress and, if they were extensive enough, 



IMPROVEMENTS IN METHODS 259 

might conceivably throw a doubt over the future of 
the working class. While there is no great dispo- 
sition to question the ultimate benefit which me- 
chanical progress insures, there is some uncertainty 
as to the process by which this benefit is extended 
to workers and there is a struggle to avoid the im- 
mediate cost. There is, in some quarters, a disposi- 
tion to rate the cost so highly as to draw the inference 
that we need to adopt a socialistic plan of living for 
the sake of enabling workers to avoid the hardships 
and secure the benefits of "labor saving," It will 
appear, however, if we grasp the essential facts of 
what we may call the dynamics of method, that the 
tendency of it is to reduce the burdens which progress 
entails, and to diffuse a large share of the benefits of 
it among the working class. It will further appear 
that the socialistic plan of organizing industry would 
at least throw a doubt over the progress itself. Noth- 
ing, on the whole, puts the future of industry con- 
ducted on the competitive plan in a more optimistic 
light than the fact of the progress in productive 
methods which it insures. It is the strongest guar- 
anty of a "good time coming," in which all himianity 
will rejoice when it comes and should rejoice by an- 
ticipation. 

The Law that insures the Survival of Beneficial Pro- 
cesses Only. — It is self-evident that wherever there 
is a saving of labor needed to make a given amount 
and kind of product, there is an increase in the pos- 
sible product that is created by the aid of a given 
amount of labor. If workers themselves get a share 
of the gains, this fact will show itself through that 
beneficent shortening of the working day to which we 
have alluded. The men will be unwilhng to stand the 



260 ESSENTIALS OF ECONOMIC THEORY 

weariness and the confinement of working through too 
many hours and will be inclined to take more holidays 
and vacations; all of which, when it comes about 
in a natural way, is an indication that the industrial 
organism as a whole has put its hand on a new and 
powerful lever and is enriching its members by means 
of it. It does, however, have to change the character 
of its work, and this means that some labor has to 
be transferred from one subgroup to another. The 
laborer displaced by an invention at a particular point 
continues to be wanted somewhere. When he and 
others have found their new employments, the good 
result appears, — the increase and improvement of 
goods produced, — and society as a whole then gets 
the benefit which would come to an isolated worker 
who, without remitting his labor, finds his appliances 
growing better and the fruits of his labor growing 
larger. The collective body gets a greater income 
than before, and the workers share in the gain. 

Importance of the New Forms which the Social In- 
come Takes. — This increasing income takes the form 
in which society now requires it, and it is this which 
brings about the readjustment of labor — or the 
changes in the amounts of labor used in particular 
subgroups — which have caused hardship in the past. 

Nature of the Incidental Evils to he Dreaded. — The 
problem we have to face is a danger that labor may 
be displaced either (1) from the particular point 
within a productive establishment at which it is now 
working, or (2) from the productive establishment 
as a whole, or (3) from a subgroup, or (4) from the 
general group of which the subgroup is a part. Out 
of industrial society in its entirety it cannot thus be 
forced. There is a case in which the men whose 



IMPROVEMENTS IN METHODS 261 

crafts are supplanted by machines may all stay where 
they are and operate the machines ; but that involves 
forcing other men to change their occupations. There 
are more cases in which these men may stay in the 
mill or shop that employs them, but not in the same 
department of it. There are still more cases in which 
they may stay in their original subgroups, and in a 
majority of cases they may stay in their general 
groups. In every instance there are places for them 
in the working society. 

Local Expulsions of Labor. — When a single em- 
ployer who is one of many competitors in an indus- 
try adopts an important labor-saving device, it may 
be possible for him to keep all his men employed and 
to let the improvement show itself wholly as a means 
of increasing the output. He may secure a machine 
which will do what twenty men formerly did. If it 
were possible to cut the uppers of a dozen shoes by the 
quick stroke of a single die, the machine that carried 
this armature would do the work of perhaps twelve 
knives , handled by that number of skillful workmen. 
If the original number of men were retained in the 
cutting department, and if each of them were fur- 
nished with the new appliance, it would mean that 
twelve times as many uppers would be cut as were 
cut before the change was made. There would, of 
course, be no use in trying to do so much cutting of 
uppers for shoes, without doing twelve times as much 
sewing, welting, making soles and heels, etc., and to 
secure all this at once would require a twelve-fold 
enlargement of the manufacturer's plant. This is too 
much to secure at once. The manufacturer might 
perhaps double the output of his mill and nearly 
double the number of his employees, but that would 



262 ESSENTIALS OF ECONOMIC THEORY 

require only two of the twelve cutters he formerly had. 
The new workers would be in parts of the mill other 
than the one where the great saving of labor was 
effected. Ten men would be removed from the cut- 
ting department, and the two left there would cut, 
by the aid of the new machines, twice as many uppers 
as the whole number cut before, and that would re- 
quire the furnishing of a double number of all other 
parts of the shoes and a. double working force to 
make them. The ten men liberated from the cutting 
department would be available for this purpose, and 
new ones would be brought in and set sewing, pegging, 
lasting, welting, etc. Within a single establishment, 
therefore, a radical saving of labor at one point usually 
involves some shifting of labor from that point to 
others, though it may increase the total number em- 
ployed in the establishment which secures the eco- 
nomical device. 

The Effect on a Subgroup of an Improvement hy One 
Entrepreneur. — If an employer who has this ex- 
perience is one of a hundred in the shoemaking 
industry and the only one who secures the cutting 
machine, the market will receive as large an increase 
of the product as would be involved by multiplying 
the output of his mill by two, without requiring that 
the price should be more than slightly reduced. An 
improvement which is monopolized for a time by a 
single entrepreneur seldom renders it necessary to 
reduce the aggregate of the labor in his employment. 
Far more often it makes it for his interest to increase 
the number and to put new labor in every part of the 
plant where no improvement in method has been 
made. It is often the fact, however, that labor has 
to abandon other establishments in this subgroup, 



IMPROVEMENTS IN METHODS 263 

and enough of it may do so to cause the amount in 
the entire subgroup to become somewhat smaller by 
reason of an improvement. In the case of a single 
employer there is a bare possibility that no one 
should be moved, in consequence of an economical 
invention, even from one part of the mill to another. 
The manufacturer of our illustration might even keep 
his twelve cutters at work after the introduction of 
the machines referred to and do twelve times as much 
cutting, provided that he could quickly increase his 
output of finished shoes to twelvefold its former 
amount. There are practical reasons why he could 
almost never do this; but if he actually did it, he 
might, by some reduction in the price of shoes, find a 
market for this increased product. If the reduction 
of price were great, some competitors would prob- 
ably go at once out of the business ; but it is never 
the policy of a successful producer to make unneces- 
sary haste in reducing prices, and, as a rule, the reduc- 
tion is gradual. The increase of product from the 
very efficient mill must cause a certain reduction in 
the rate at which it sells its goods, and this is apt to 
force manufacturers who are particularly ill equipped 
and cannot keep pace with the rate of improvement 
which their enterprising competitor establishes to go 
out of business. They thus relieve the market of so 
much of the product as they have contributed and 
make a place for the increased output of the newly 
equipped mill. In such a case the total output from 
the subgroup is not very greatly increased, and the 
price of the product does not need to be greatly 
reduced. 

Standard Prices fixed hy Cost in the most Economical 
Establishment. — It is a vitally important fact, as 



264 ESSENTIALS OP ECONOMIC THEORY 

we shall soon see, that the price of an article is, in a 
dynamic society, always tending toward the cost of 
making it, not in the most inefficient establishment, 
where it is produced "at the greatest disadvantage," 
but in the most efficient one of all. The ultimate 
effect of any great improvement is naturally to 
close the shops of all employers who do not adopt 
it or get an equivalent advantage of some kind. Ulti- 
mately the whole subgroup will be in the state of 
efficiency it would have reached if the improvement 
had been adopted by every entrepreneur on its first 
appearance. 

The Effect of an Improvement in Production which is 
quickly adopted hy a Whole Subgroup. — When an 
improvement is immediately adopted, not by one 
employer merely, but by all employers in a subgroup, 
it is likely to cause a quicker displacement of labor 
from the subgroup as a whole. A very economical 
machine introduced by its inventor or manufacturer 
and quickly adopted by all employers at A'' would 
nearly always force a certain number of laborers to 
leave that industry and find employment elsewhere, 
if it were not for one commercial fact, namely, the 
reduction in the price of the product and the con- 
sequent enlargement of the demand for it. 

How Labor may be displaced from a General Group. — 
The amount of A' that can be created depends on the 
amount of A that can be furnished as material to be 
transformed into A', and also on the amount of A' 
that will be taken for conversion into A'\ This again 
depends on the amount of A'' that will be accepted 
by employers at A'" and sold in this last form to the 
consuming public. If the market for A^'' cannot 
be much increased by a moderate reduction of the 



IMPROVEMENTS IN METHODS 265 

price of it, some labor may have to go into the group 
of 5's or C's; and in any case there must be new labor 
in A, A", and A'" if the product of A' is increased. 
We can now measure the difference between the 
effect of the adoption of an improvement first by one 
employer and much later by others, and that of the 
quick adoption of it by all. In this latter case there 
is not much delay in increasing the output of the goods, 
and the market for them does not have time to grow 
larger because of the growth in the numbers and the 
wealth of the community. Unless the present mar- 
ket will take an enlarged quantity of the finished goods 
without requiring that the price should go below the 
new cost of making them, some labor will have to 
leave the general group. 

How Patents may Cause an Increased Displacement 
of Laborers. — What we often see is the nearly simul- 
taneous adoption of a labor-saving device by all lead- 
ing employers in one industry. Something like this 
takes place when the makers of a valuable machine 
retain the patent on it in their own hands, and press the 
sale of it on all the producers who have use for it. In 
this case, however, the makers usually put the price 
of the machine at a figure that, while it affords an 
inducement to buy it, does not reduce the cost of the 
goods that it helps to make enough to cause a great 
increase in the demand for them. The owners of the 
patent on the new appliance charge for it "what the 
traffic will bear"; and until the patent runs out, the 
users of the machine have to sell their goods almost at 
as high prices as before. If the machine enables one 
man to do the work of a dozen, eleven men must find 
other things to do. They could find them in their 
own industry if the product of it were enlarged in 



266 ESSENTIALS OF ECONOMIC THEORY 

consequence of the use of the machine; but if the 
high price of the patented machine prevents this, they 
must go elsewhere. When the patent runs out, there 
is hkely to be a considerable enlargement of the in- 
dustry, and how important this fact is we shall soon see. 
How Improvements which call Labor to a Particular 
Establishment may displace Labor from a Group. — 
Another typical case is afforded when some one 
employer has for a time the exclusive use of a labor- 
saving device, and pushes his production to the ut- 
most in order to get the full benefit from it. Here are 
seen the more characteristic effects of such an im- 
provement. It draws labor to the employer who for 
the time being monopolizes the new instrument of 
production, but it turns labor from the subgroup of 
which this employer is a member. He enlarges his 
output and in time this reduces the price of the prod- 
uct. In the field there are marginal mills, or those so 
antiquated, ill situated, or badly run that, with their 
product selUng at the former price, they could barely 
hold their own; and now that the price is reduced, 
they lose money by running. They have to cease 
operating, and this makes practicable a further en- 
largement of the product of the efficient mill. Much 
labor goes thither, but some part of that which leaves 
the abandoned mills betakes itself to other subgroups. 
Not often, indeed, does it have to go to other general 
groups. The cheap transformation of the material 
A into A' enlarges the market for A^ and calls for more 
labor at A, and it involves more at A'^ and A''\ If 
the change of method had been gradual, the growth 
of the social demand for A'" would probably have 
precluded the need of sending any labor out of the 
entire group of ^'s. Even a rapid change often sends 



IMPROVEMENTS IN METHODS 267 

labor out of one subgroup into other subgroups of 
that series rather than into other general groups. 

An improvement that should reduce the cost of 
converting leather into shoes would^ by the sale of the 
shoes, call for more leather, more cattle, more appli- 
ances, more tanning, and larger buildings for shoe 
factories, furnished with more shoemaking machinery 
and greater motive power, even though the particular 
machines which were improved by the invention had 
become so much more efficient that no more of them 
were needed. This depends on the extent to which 
a certain reduction of cost of a product enlarges the 
market for it. 

Principles Governing the Enlargement of the Effec- 
tual Demand for One Commodity. — In determining 
how much a reduction of the price of a single article 
will at once enlarge the market for it, there are two 
things to be considered, namely, the elasticity of the 
want itself to which the article caters, and the extent 
to which an article catering to a particular want may 
be substituted for other articles designed to satisfy 
the same one. The desire for jewels and other articles 
of personal adornment is very expansive, and a fall in 
the price of any one article of this kind causes a 
relatively large increase in the consumption of it. 
Since the want to which a costly ornament caters is 
thus elastic, the cheapening of all -articles that cater 
to this want would enlarge the consumption of all of 
them. The cheapening of a particular one of these 
articles, if there were in the market many others of 
the same general kind, would cause that one to be 
extensively used in preference to the others. By an 
enlargement of the total amount of decorative articles 
used and by a relative favoring of a particular one of 



268 ESSENTIALS OF ECONOMIC THEORY 

them at the cost of others, the sale of that one would 
be doubly increased. Cheaper diamonds might mean 
an increased use of them without any large reduction 
in the use of other gems; but if many other gems 
happened to be available for the purposes sub- 
served by the diamonds the use of these others would 
be curtailed and that of diamonds would be dispro- 
portionately increased. 

The Value of Goods as affected by the Existence of 
Castes. — One of the reasons why the market for jewels 
is thus elastic is the fact that they serve as badges of 
caste, as only something of large cost can do. If, 
therefore, all gems were to become much cheaper, 
two things would happen : (1) relatively poor people 
would buy some of them — partly in lieu of imitations 
and of cheaper real jewels; and (2) rich people would 
have to buy more and costlier ones than were formerly 
needed, in order to retain their positions in the social 
gradations. This principle affects the consumption of 
a wide range of articles, the possession of which seems, 
outwardly at least, to stamp the owners as belonging 
in a certain stratum of society. It increases the de- 
mand for fine clothing, furnishings, and equipage, 
multiplies social functions, and induces participation 
in all manner of costly diversions. The elasticity 
of the market for luxurious goods is, in general, 
greatly increased by the action of this motive. The 
cheapening of them causes them to be consumed by 
the lower classes and renders the use of greater quan- 
tities or higher qualities of them a social necessity 
for the higher classes.^ 

* It is also true that an entire variety of gems or other things 
of this genus might, by mere cheapness, be branded as too com- 
mon to be used by the very wealthy, except for new and in- 
ferior modes of adornment. 



IMPROVEMENTS IN METHODS 269 

We shall soon see that a reduction in the cost of any 
one article usually causes the use of it to trench on 
that of all manner of things which are on the margin 
of consumption and are not similarly cheapened. 

Changes of Cost of Different Goods Never Uniform. — 
The cost of all articles is never reduced at the same 
time, and it is impossible that all of them should re- 
main in the same order of desirability in the estima- 
tion of purchasers. Many things, however, are often 
cheapened at the same time, though in different 
degrees. Whatever furnishes a very common raw 
material at a lower cost than has prevailed, as did 
the invention of the Bessemer process of steel making, 
makes everything into which that material enters 
cheaper. By reducing the cost of railroads and 
engines, cars and steamships, the Bessemer process 
indirectly lowered the prices of goods that have to be 
carried, which means practically everything. A cheap 
motive power acts in the same way and lowers the 
costs of producing an unlimited number of goods. 
Even in the case of such general improvements as 
this the reductions of price are not uniform. Some 
goods are affected more than others. Cheap steel 
lessens the cost of bridges more than it does that of 
dwelling houses, and in the case of many improve- 
ments the effect is confined to a limited class of prod- 
ucts, if not to a single one. 

How the Disturbing Effect of a Single Improve- 
ment is Limited. — In the case of consumers' goods 
improvements are going on so nearly incessantly 
and at so many points that the effect is much the 
same as if every invention cheapened most of them 
at once. Harmful disturbances are reduced to 
minute dimensions by the multiplying of the changes, 



270 ESSENTIALS OF ECONOMIC THEORY 

each of which, if it occurred alone, would produce 
a hurtful effect. Many inventions cancel one an- 
other's unfavorable effects in a way that we shall 
later examine. What we now have to do is to 
isolate a single productive change and see whether 
there are forces working to reduce its own independ- 
ent power to create incidental disturbance. What 
limits the power of a single new and economical 
process to eject laborers from their accustomed 
places of employment? This question cannot here 
be answered in detail, but a brief statement will 
cover the general principles involved. Obviously 
the displacement varies inversely with the extent 
to which increased cheapness enlarges the consump- 
tion of the article affected. If by making one thou- 
sand men produce as much of the commodity as 
two thousand formerly produced, you so reduce 
costs as to double the consumption of the article, 
you keep all the men who formerly made it in their 
accustomed places of employment. The elasticity 
of the want itself to which the article caters is one 
of the two elements that determine the increase 
in the consumption of it; but when this increase 
is due to an extensive substitution of this article 
for others in the purchasing lists of the consuming 
public, the result is greatly to reduce the displace- 
ment of labor which the new and economical method 
of production entails. Such substitutions are very 
general and are a large factor in rescuing men from 
the hardship of being forced out of the employments 
they are used to. 

On what an Enlarging Market for Tools and Raw 
Materials Depends. — The market for raw materials 
and tools depends on that for consumers' goods in 



IMPROVEMENTS IN METHODS 271 

their completed state. If A, the raw material, 
enters only into A'", it can be sold in increasing quan- 
tities only as A'" is thus sold. The chief fact about 
tools and materials is that they may contribute to 
a large number of completed goods, and the signifi- 
cance of this fact we shall soon see. The ultimate 
power to find a market for all products of the lower 
subgroups depends on finding one for the products 
of the uppermost ones — the A'", B'" , and C" of 
our table. The laws which govern the market 
for finished goods of declining cost have first to be 
studied. 

The Effect of Substituting one Consumers' Good 
for Others. — Reducing the cost of everything would 
cause an absolute increase in the consumption of 
everything; but reducing the cost of a single thing 
always causes, as we have seen, a relative increase 
in the consumption of that one product. While 
the demand for other articles may not grow ab- 
solutely less, it becomes relatively less because of 
the comparative cheapness of the one product.^ 

^ It is worth noticing (1) that uniformly reducing the cost 
of everything would cause comparative changes in consump- 
tion. Anything which should take away a quarter of the 
cost of every article in the entire list of social products would 
increase the consumption of some articles more than it would 
increase that of others. There is an extremely theoretical 
case in which there might even be a lessening of the effectual 
demand for a few things because a uniform reduction of 
twenty-five per cent would cause other things to be exten- 
sively substituted for them. This thinkable possibility is 
not practically important. 

A detailed study would show (2) that a reduction in the 
cost of any single article in the entire list of social products 
causes an increase in the consumption of commodities in 
general. As an isolated man who has had to work hard for 
mere food and content himself with a few comforts and no 



272 ESSENTIALS OF ECONOMIC THEOEY 

A substitution of one article for another in the Hsts 
of goods used by the pubHc is a universal phenom- 
enon attending an improvement which affects the 
production of one article only. When the cost of 
A"' causes it to stand just outside of the purchase 
limit of a large class of persons, a moderate reduction 
in the cost of it will make it a more desirable sub- 
ject of purchase than the articles which have stood 
just within that limit, and it will be bought instead 
of one or more of these things. The securing of 
new customers for a finished product by means of 
a fall in the price of it is largely brought about by 
such substitutions. When the new article is added 
to a consumer's list, the one which has stood as his 
marginal or least desirable purchase is taken off 
from it. It is the relative desirability of buying 
one or the other of these articles that influences 
a buyer in his decision between them, and that 
cannot fail to be changed by anyiihing that lowers 
the cost of one, leaving that of the other unchanged. 
If the cost of a unit of each of ten articles be rep- 
resented by the lines falling from the letters A, 
B, C, etc., to the base of the figure, a considerable 
fall in the cost of A would put it below the cost of 
each of the other articles represented. If in the 
case of a large class of persons who did not formerly 
buy any of the A it is as desirable as any of these 
goods, it will take its place as the most desirable 
subject of purchase instead of the least desirable. 



luxuries will indulge in luxuries when food production becomes 
much easier, so society as an organic whole will increase its 
indulgences all along the line whenever the work of getting 
any one thing is reduced and some working time is thus 
liberated. 



IMPROVEMENTS IN METHODS 



273 



Those whose available means enabled them to ac- 
quire all the articles from J to B inclusive, but did 
not suffice for A, will now take the A and omit the 
B. Those whose acquisitions stopped with C will 
substitute A for that article, and in general every 
buyer of any of these things who has not hereto- 
fore acquired A will now put this in the place of 
the one which it was least worth while to acquire. 




Substitutions caused by a Cheapening of one Utility 
in an Article which is a Composite of Several. — 
When different goods cost unlike amounts but are 
objects of equally strong desires, only one of them 
is a marginal purchase, and the others afford a per- 
sonal gain to the consumer which is not offset by 
a cost. We have seen that this rule applies to the 
different utilities in a single good. In the case of 
every article several grades of which are sold, there 
is one component element or one utility which is 
worth to the buyer exactly what it costs, while the 
others afford a consumers' surplus. If the letters 
in the diagram represent, not whole articles, but 
utilities in articles, as discussed in Chapter VI, it 
will accurately express the essential facts. In 
such cases, which are very numerous, it is only 
necessary to reduce the price of the one utility which 
is now just worth its cost in order to induce more 



274 ESSENTIALS OF ECONOMIC THEORY 

consumers to buy the grade containing this utility, 
instead of a lower grade of the same thing. In 
doing this, they forego the purchase of something 
else altogether, or content themselves with a lower 
grade of that other commodity. If jeweled watch 
cases should become cheaper, some persons would 
substitute them for plain cases and would forego 
buying, say, pictures which were just within their 
purchase limit, or would content themselves with 
cheaper pictures. This taking of one thing within 
the margin of consumption and discarding others 
is far less frequently done than is the taking of a 
lower grade of one kind of goods for the sake of 
securing a higher grade of another. 

Why Substitutions reduce the Displacements of 
Labor. — The question will, indeed, arise why the 
burden caused by the change may not be merely 
transferred to men in industries the products of 
which are displaced by the substitution. Some- 
thing of this kind would occur if, in consequence 
of the cheapening of one article, any one other were 
generally discarded. The important fact is that it 
is not any one thing, but a wide range of things 
which are consumed in smaller quantities in con- 
sequence of the change ; and the effect on the makers 
of any one of them is small. If a thousand men 
begin to buy the A"' of the table we have frequently 
used, some of them will forego B'^', some C", and 
so on through the list; and the market for no one 
of these things will be much affected. Moreover, 
the nearly universal fact is that a man who begins 
to buy one article that he never before used will 
save the price of it by contenting himself with a 
slightly cheaper quality of a number of others. 



IMPROVEMENTS IN METHODS 275 

He will give up a dozen utilities in as many entire 
commodities in " order to be able to buy the one 
entire commodity that he adds to his purchasing 
list. The reduction of demand is so extensively 
subdivided that it causes relatively few displacements 
of labor. 

Substitution a Prominent Cause of Varying Sales 
of Goods. — Substitution is, then, the general rule' 
whenever the cheapening of a commodity wins 
new purchasers of it. This practice is not indeed 
universal in the case of those who formerly con- 
sumed these goods. Former purchasers of an article 
which has become cheaper may make no change 
except to buy more of it or a better quality of it 
for the same amount which they have been accus- 
tomed to spend for the inferior quality. They are 
not then obliged to economize in any other direction, 
and the change does not trench on their consump- 
tion of other goods. On the other hand, it is some- 
times the case that they continue to use the original 
amount of the article that has become cheaper and 
use the liberated means of purchase — the "money," 
as it would ordinarily be termed — in buying other 
goods. The cheapening of A''' thus even enlarges 
the demand for B'", C"\ etc. There are thus two 
cases in which a reduction in the cost of one thing 
would not decrease the use of other things. 

Substitution More General in the Case of New Con- 
sumers. — The substitution of a cheapened article 
for others is the dominant fact in the case of new 
consumers of such an article, while an increased 
consumption of other things sometimes occurs in 
the case of old consumers. This does not have as 
large commercial effects as the other change. If 



276 ESSENTIALS OF ECONOMIC THEORY 

we produce cheaper shoes, we make it easier to ac- 
quire good ones, and those who formerly contented 
themselves with an inferior kind take a better one. 
That means that they add to their purchase lists 
the higher utility which is present in the one grade 
and absent in the other. They buy a new element 
in goods rather than more of those goods, and while 
they may not always change their consumption 
of articles of other kinds they more frequently do 
so. Those who begin to use something which for- 
merly they went without altogether usually give 
up the use of some good or some quality in it, or 
get on with a smaller quantity of it in order to make 
the new indulgence practicable. The man who, 
when bicycles became cheap, bought the first one he 
ever owned probably gave up some other gratification. 

How the Sale of Goods which wear out in the Us- 
ing increases as the Price Falls. — When goods 
deteriorate as they grow older, users have to buy 
new ones often if they are not willing to use those 
which are worn out and inferior. If we want always 
to wear clothes of good quality, we refrain from 
wearing a suit too long. We discard many things 
when they have somewhat deteriorated, and this 
forces us to buy, in a term of years, a larger number 
of them than we should otherwise do. We discard 
carpets and upholstery early when they are so cheap 
that we can afford to do so. We thus improve our 
goods qualitatively by adding to them quantitatively. 

Substitutions a Protection for Labor against Undue 
Displacements. — Now, not only are the substitutions 
we have cited of commercial importance, but they 
act in the direction of retaining labor in a group 
where ''labor saving" has been effected. They help 



IMPROVEMENTS IN METHODS 277 

to prevent this process from being equivalent to 
labor expelling in so far as either a general group 
or a subgroup is concerned, since they increase 
the social demand for the products of the group in 
question and cause a relative diminution of the 
demand for other things. Quite evidently there 
is, for these reasons, the more need for labor within 
this group and less need of it elsewhere. Cheap 
shoes may thus never mean fewer shoemakers and 
cheap watches may not ever mean fewer watch- 
makers. 

Substitutions of One Capital Good for Others. — It 
is not merely in the realm of consumption that the 
demand for a particular good may increase greatly 
in consequence of cheapness. The same thing 
happens in the realm of production, but here the 
substitution of one thing for others is an even more 
prominent cause of the increased use of the partic- 
ular commodity. Aluminum and copper are rivals 
as carriers of electrical power, with the advantage 
at present somewhat in favor of copper. As soon 
as the cost of making aluminum shall be reduced 
by a moderate fraction it will become the cheaper 
material for such uses and, unless there is a fall in 
the price of copper, will thrust itself into use for 
trolley wires and other conductors of electricity. 
The possession of an enormous market by the one 
or the other material depends on their relative costs, 
and these may easily so change as to transfer most 
of the demand from the one material to the other. 
A further fall in the cost of aluminum would make 
it available for sheathing the hulls of ships and 
would bring it into general use for many household 
implements, while a sufficient fall would make it 



278 ESSENTIALS OF ECONOMIC THEORY 

a leading building material and give it a limitless 
market for the framing and finishing of substantial 
structures. In these various uses it would sub- 
stitute itself, not only for copper, but for steel, stone, 
wood and other materials, and the change would 
be extensive enough to give it an enormous market 
without requiring a correspondingly great reduction 
in its cost. Lowering the cost of aluminum by a 
third might, by merely making it the favorite carrier 
of electricity, multiply the present use of it by ten, 
and lowering it by two thirds might multiply the 
present use of it by a hundred. If this should 
take place, saving labor would be anything rather 
than expelling it from its position in the aluminum- 
making group. When less labor came to be needed 
for making a ton of the metal, more labor would be 
used in the industry that makes it. 

So long as the substitution caused by the cheapen- 
ing of aluminum affected copper only it might be 
a serious matter for the producers of copper; but 
when it came to replacing in some degree steel, 
stone, brick, wood, and other materials, the effect 
would be so diffused and subdivided as to create 
small disturbances in any one of these industries. 

Effects of Reduced Cost of Materials which al- 
ready enter into Many Finished Products. — In the 
case of aluminum the prospect of a greatly increased 
market brings with it the probability that it may 
come to be a component element of products into 
which it does not at present to a great extent enter. 
Such things as steel, stone, and wood already con- 
stitute important components of more articles than 
can be counted, and there is no great prospect that 
they will enter into a much greater variety of prod- 



IMPROVEMENTS IN METHODS 279 

ucts. In the case of these materials there is a 
prospect that cheapness will show itself in reduced 
costs of the finished goods that are made of them, 
and that these finished goods will be used in greater 
quantities without substituting themselves for other 
things in so drastic a way as that which we have 
described in the case of aluminum. A reduction 
in the cost of steel would indeed bring about a sub- 
stitution of that material for others at every point 
where the steel and something else are now on a 
plane in desirability. The type of building that now 
is made with plain brick walls and wooden floors, 
because that cheap mode of building enables it to 
earn a slightly larger interest on its cost, would 
often be made with a steel frame and concrete floors. 
At every such marginal point steel would gain some- 
what on its rivals in the extent to which it would 
be used; but in addition to this enlargement of 
the market for it by substitution, one might count 
on an increase in the use of it because of an increase 
in the use of very many things that are already 
made of it. Some of these cater to highly elastic 
wants, and persons who use a quantity of them 
may be induced to use more without discarding 
anything else. Such an absolute enlargement of 
consumption is highly probable in the case of any 
material that enters into a vast number of products, 
and this, together with the enlargements that come 
by substitution, may suffice to create a great demand 
for the raw material and call for as much labor in 
the subgroup that makes it as was used before 
the improvement was made. In the case of the 
raw materials of industry the resources for gaining 
an increased market by substitution are : — 



280 ESSENTIALS OF ECONOMIC THEORY 

(1) The substitution of the material for others 
in uses different from those in which it is now 
employed; 

(2) The substitution of it for other materials in 
the marginal parts of its present field, where it is 
already nearly as available as other things; 

(3) The substitution of the finished consumers' 
goods made of it for other consumers' goods. 

In addition to all these there is the direct increase 
in the use of finished goods wholly or partly made 
of the material by persons who do not, for this 
reason, discard any other goods. 

This statement places the different influences in 
the order of their relative efficiency in the majority 
of cases in which they act. 

Effects of cheapening Tools of Industry. — What 
is true of a raw material which enters into many 
completed products is true of the tools of industry 
which are used for many purposes. A turning 
lathe, a planing machine, or a circular saw helps 
to make a large number of products, and the as- 
sertions we have made concerning steel, stone, or 
wood apply to it. As it becomes cheaper it gains 
an enlargement of its market by a combination of 
the four influences just enumerated. It is brought 
into new uses, is employed more in its present mar- 
ginal uses, and is required in greater quantity be- 
cause its products are substituted for other things 
and are also required in greater amounts independ- 
ently of these substitutions. 

Cheap Motive Forces. — Motive power is so nearly 
universal in its applications that developing a cheap 
source of it is much like improving the method of 
producing everything and securing a universal 



IMPROVEMENTS IN METHODS 281 

increase of products. We shall see why such a 
general enlargement of the output of all the shops 
creates no displacements of labor which entail hard- 
ships. If the power is used more in the upper sub- 
groups than in the lower ones, — if it is more fre- 
quently available for fashioning raw materials than 
for producing them through agriculture or mining, — 
the development of it checks in some degree the 
drift of labor from the lower subgroups toward 
the upper ones, which has been referred to in an 
earlier chapter. 

Utilizing the power of Niagara, that of Alpine 
torrents and other unused streams, that of the 
waves of the sea, and that which has long slumbered 
in the culm heaps of coal mines, will give increased 
facility for producing nearly everything; and though 
the amount of the enlargement of output will vary 
in different cases and some effect on the movements 
of labor will be produced, few serious hardships will 
result, and a majority of the persons who will suffer 
from these changes at all will get an offsetting benefit 
from the enlarging productiveness of industry. 



CHAPTER XVII 

FURTHER INFLUENCES WHICH REDUCE THE HARD- 
SHIPS ENTAILED BY DYNAMIC CHANGES 

In the absence of an unusually great increase in 
the consumption of an article the improvement 
which reduces the cost of it tends to displace labor. 
The first thing that will occur to any one who looks 
for influences which mitigate this evil is the fact 
that economical changes are going on at nearly all 
points in the system, and that this cancels out 
most of the displacing influence. If something 
sends men from the group A to groups B and C, 
while something else sends them from the group 
B to groups A and C, and still another influence 
impels men from C to ^ and B, there is likely to be 
very little actual moving. A question will in such 
a case arise as to whether the three movements may 
not expel labor from all the groups and remand them 
to a state of idleness. History is clear in the answer 
it gives to this question; such a result has not oc- 
curred, and at the end of a century of brilliant me- 
chanical progress the" amount of enforced idleness 
is not greater than it was at the outset. It remains 
to show that economic law precludes a universal 
displacement and insures laborers for all time against 
being at the mercy of an industrial system which has 
nowhere any need of their services. Productive 
devices^ widely introduced mean great and general 
. 282 



LABOR AND GENERAL PROGRESS 283 

gains and comparatively little cost. They mean 
what on their face they ought to mean, more com- 
forts and less toil for everybody. Before studying 
this influence. — the reciprocal action of improvements 
scattered through the general economic system — we 
have to determine the action of one or two other 
influences which also lessen the disturbances which 
progress causes. 

One can see that the quick adoption of an economi- 
ca,l device in every shop of a subgroup, at a time when 
all other industries are in a stationary state, would 
usually expel some labor from that one. If consumers 
should, on a large scale, substitute the product of 
this subgroup for that of others, it might save the 
situation; but the general fact is that the consump- 
tion of the cheapened product must increase in a 
ratio that is greater than the ratio representing 
the saving of labor used in making it, in order to 
prevent displacement of labor. If we get on with 
two thirds of the labor which the making of the 
commodity out of raw materials formerly required, 
we do not save two thirds of the total expense of 
making the finished article; and yet to retain all 
the labor that is now in the business we must sell 
one and a half times the former number of the goods 
produced.^ 

* The mathematical problem stands thus : If all the sub- 
groups of the A series have the same amounts of labor and a 
machine enables a half of the force now in A" to do all that 
is required in transmuting the usual supply of A' into the 
usual amount of A", then some of the labor in A" would in 
most cases betake itself to entirely different industries. The 
superfluous labor at A" would amount to an eighth of all 
the labor required for the complete creation of A'". If wages 
constituted the only cost which the entrepreneur must defray, 



284 ESSENTIALS OF ECONOMIC THEORY 

Counteracting Influences. — The importance of a 
gradual introduction of an improvement rather than 
a rapid one lies in the fact that it permits these influ- 
ences to do their work and often to render the actual 
moving of laborers even from their subgroup unneces- 
sary. Time is the salvation of the laborer menaced 
by an impending displacement from his field. When 
we see what is the grand resultant of all the dynamic 
influences we are studying, we shall see how this 
neutralizing and canceling of the labor-expelling force 
takes place. But for them one isolated change would 



the price of A'" would be reduced to seven eighths of the 
former price, and this might, in the case of some goods, 
enlarge the demand to eight sevenths of its former amount 
and so keep all the labor in the general group. Since there are 
outlays to be met besides wages, this reducing of wages by an 
eighth would not usually reduce total cost by more than 
about a twelfth, and even if price quickly went down to 
eleven twelfths of its former amount, it would be too much 
to expect that the consumption of the A'" should increase 
by a seventh, except in cases in which this amount of re- 
duction of price caused A'" to take the place of B'", C" , 
etc., in the purchase lists of many consumers. The enlarge- 
ment of consumption would have to take place in a ratio 
greater than that which represents the saving in cost. Cost- 
ing eleven twelfths as much as before, the article must sell 
eight sevenths as freely — which is possible only when it 
thrusts itself extensively into the place of other consumers' 
goods. Even then some labor would have to move from A" 
to other subgroups of the series. One half of the amount 
of labor formerly at A" does the whole work formerly done 
there, and to keep it all at work at that point would re- 
quire that the output from the whole group be doubled. 
Saving one twelfth in cost could not well insure selling double 
the amount of goods. In this view improvements would 
have a threatening look, though their ultimate effect would 
still appear as beneficial as ever, were it not for the fact 
that the disturbances that result from them are made to be 
relatively small by the influences we are studying. 



LABOR AND GENERAL PROGRESS 285 

tend to expel labor from its subgroup and would 
nearly always send it away from the point within 
an establishment where the new device is introduced. 
It usually attracts labor to this establishment and 
away from the inefficient or marginal ones. A grad- 
ual adoption of the improvement allows time not 
only for a general increase in the size and the wealth 
of the community, but for other influences which act 
more quickly and in practice make it nearly always 
unnecessary to reduce the total amount of labor in 
an industry which produces an article in permanent 
demand. Statistics may be confidently appealed 
to in support of this general statement. 

The Dynamic Law of Price and its Effects. — We 
briefly noted in passing that the price of a product 
the making of which is subject to repeated improve- 
ments naturally tends toward the cost of it in the 
establishment having the latest method and the 
greatest facilities for production. The natural price 
at any time is the cost of that part of the supply 
which is created at the greatest advantage, and not 
the cost of the part produced at the greatest disad- 
vantage, as an old formula expressed it. It is the 
mill that makes the goods most cheaply which is 
enlarging its product and bringing the price down 
toward its level of cost; as soon as other establish- 
ments get possession of the improvement they help 
forward the process, and as they get still better 
appliances they help in carrying the price to still 
newer and lower standards. 

The Cause of the Coincidence of Maximum Cost and 
Price. — At any one moment, it is true, there are ill- 
located, ill-equipped, or ill-managed mills that are 
making nothing and are likely soon to be abandoned. 



286 ESSENTIALS OF ECONOMIC THEORY 

They are the marginal mills we have spoken of, and 
the goods that they make cost all that purchasers 
will give for them. This insures a coincidence of 
the price of the goods with the cost of making them 
in such a mill, but this is merely an incident in the 
process of eliminating the inefficient establishments 
from the field. In the mill which happens at this 
date to be the one about to be crowded out the cost 
of the goods equals the selling price of them and will 
exceed it as soon as the price goes to a lower point. 
This cost happens transiently to coincide with the 
price, but does not regulate it. It is the outlay that 
the best mill incurs that does that, since it sets the 
standard toward which the price is made to tend/ 

> Improvements and Prices under Competition 

The figure represents a subgroup in which five producers, 
a, h, c, d, and e, are operating. Later, a new estabhshment 
/, is introduced. The upper dark line represents the price 
of a unit of the product, and the lower dark line the cost of 
making a unit in the establishment which is for the time the 
most efficient. 

The dotted lines represent the respective costs of produc- 
tion in the different mills, ranging from a, the most efficient, 
to e, which can barely hold its own. What the figure repre- 
sents as happening is as follows: — ■ 

h first makes an improvement which lowers his cost of 
production, as shown by the descending dotted line. This 
enables him to increase his output, and so has its effect on 
the price, which descends. Now, producer e was already 
selling goods at cost, but he is not at once driven out of the 
business. Instead, even though he cannot earn full interest 
on the original cost of his fixed establishment, he will con- 
tinue to run as long as he can make his plant earn anything 
at all. The result is a virtual reduction of the capitalized 
value of the plant (the interest on which is an item of cost), 
and this is what is represented by the descent of the dotted 
line which represents e's cost of production. The situation 
is now represented by the series of points, — &', a', c', etc., 



LABOR AND GENERAL PROGRESS 287- 

The Importance of Delay in the Closing of Marginal 
Establishments. — Now, this process looks as if, by the 

representing at their second stage the differing levels of cost 
in the case of different producers. 

The next thing that happens is an improvement made 
by a, causing his cost of production to fall below that of h. 
The resulting fall in price now finally drives e out of business; 
he can no longer earn anything at all on his fixed plant. W*^ 
may assume that producers a, b, and c, who have been mak- 
ing profits, have enlarged their productive capacity enough 
to supply the market fully without e's contribution, d is 



e DRIVEN OUT OF BUSINESS 

^^'"s^^^. d-DRIVEN OUT OF BUSINESS 



, C DRIVEN OUT OF BUSINESS 



U^ ?yjr'iiG COST 

OF PRODUCTION 



now in the same position in which e was at the preceding 
stage, — earning nothing on his fixed establishment and 
barely induced to remain in the business. 

The next occurrence represented is the opening of a new, 
large, and very efficient mill by /. The effect is like that of 
improvements, but more violent. The fall in price drives 
both d and c out of business, h is now on the margin, but 
saves hiinself from loss by a second improvement, which 
makes him again the most efficient producer. And so the 
process goes on ad infinitum. 

This figure illustrates the fact that, while at any time the 
price of a good roughly equals the cost of it to the least effi- 
cient producers, still this cost does not govern the price. The 
ruling factor is the cost in the most efficient mill, toward 
which the price tends ; and all that the cost in the least effi- 
cient mill determines is how long that mill shall continue 
running. 



288 ESSENTIALS OP ECONOMIC THEORY 

closing of mills that are distanced in the race of im- 
provement, labor must be forced out of the sub- 
group. So it would be if the reducing of the price to 
its new static level were an instantaneous operation 
and the inferior mills were, in the same instantaneous 
fashion, compelled to close their doors. These, how- 
ever, are gradual operations, and before they can 
possibly produce their full effects, influences will have 
been set working which will counteract the expelling 
tendency. We have cited as such an influence the 
general growth of society in numbers, wealth, and con- 
suming power, making it possible for a group, when 
an economical change has taken place, to produce and 
sell more goods than before and to keep its accustomed 
force of labor in order to do so. There are certain 
more specific influences which have a similar effect and 

In order that the claim here made — that price equals cost 
in the establishment which is about to be crowded out of the 
field — may hold good it is necessary to define terms with 
some care. In a typical case an employer who is destined 
soon to close out his business has, perhaps, an antiquated 
mill, which itself pays nothing, but enables its owner to use 
circulating capital and labor in a way that affords interest 
on that capital and wages for the labor. No interest on 
the cost of the antiquated mill is chargeable to the business 
unless the site and the building can be sold for a new purpose. 
If they have completely lost all productive power, they are 
not, as we use terms, capital goods at all; and in that case 
the only interest which the entrepreneur should reckon as 
a cost is that which accrues on other capital used in connection 
with the worthless mill. If the site and the building have 
some value for another purpose, and if the machinery has 
some value as junk, then whatever the owner can get by 
disposing of the plant constitutes a sum the interest on which 
constitutes a cost of producing goods in this mill. It is a 
sum which the plant owner foregoes as long as he refrains 
from selling the plant. He can afford to use it in production 
as long as the price of the product covers the cost as thus 
defined, but must stop when it ceases to do so. 



LABOR AND GENERAL PROGRESS 289 

render it as unnecessary as it is useless to attempt to 
resist the course of improvement. 

Centralization of Business an Effect of Progress. — 
From the facts here cited it appears that conserva- 
tism of the kind that resists all changes condemns 
an entrepreneur to destruction. He must keep in a 
moving procession in order to survive. As the 
essential thing which is changing is the price-making 
cost of goods, the entrepreneur must see to it that in 
his establishment cost declines. While this does not 
necessarily mean that every such establishment needs 
forever to grow larger, since there are local conditions 
in which relatively small shops may be economical 
enough to survive, yet those which cater to the general 
market and directly encounter the competition of the 
great producing establishments must, as a general rule, 
have the advantages of great size in their favor, or 
sooner or later be crowded out of the field. Many of 
the smaller ones fall by the wayside, and the business 
they have done passes to their already large rivals. 
Wherein the advantages of the great shop lie and how 
one that is of less than a maximum size may survive 
in spite of them, are points for later consideration. 

How Displaced Labor is Replaced. — When men are 
actually forced to leave an industry, — say the sub- 
group A', — they find themselves, in the search for 
employment, in the same position as a body of 
newly arrived immigrants in quest of work. Men of 
either class must offer themselves at a rate that will 
induce employers to take them. If much new cap- 
ital has lately been created, it is naturally possible for 
the men to get employment without having to over- 
come serious friction or to reduce their demands in the 
way of pay. In the absence of such additions to the 



290 ESSENTIALS OF ECONOMIC THEORY 

capital, they might possibly have to offer some in- 
ducement to employers, in order to overcome their 
reluctance to make changes in their shops. We shall 
see in due time, however, that where improvements 
are well distributed through the industrial society 
and have their natural effect, they tend to increase 
the general demand for labor at the original rate of 
pay. 

Effects of a Series of Improvements confined to One 
Industry contrasted with those of Improvements diffused 
through the Groups. — A continuous series of radical 
improvements, all originating at one point, would 
tend of themselves to cause a series of expulsions of 
labor from that point, and the mere increase of popu- 
lation and wealth might not so fully counteract this 
tendency as to prevent a positive exodus of labor 
from the occupation affected. A merely relative re- 
duction of labor in this occupation would not cause 
much hardship, since it would only mean that other in- 
dustries were attracting the greater number of young 
laborers entering the field and gradually getting a 
larger and larger part of the whole working popula- 
tion. If men actually in A' can stay there, no one is 
injured; but too great a concentration of improve- 
ments at this point might drive some of them away. 
Such concentration is the opposite of the general rule. 
Improvements do not confine themselves to one point 
or to a few points, but originate at very many, and 
this fact neutralizes their labor-expelling tendency and 
might reduce it practically to nil. If labor could be 
made more efficient in every group of the whole sys- 
tem, the result would be to increase the quantity 
of every kind of goods. Making more of one's own 
product is acquiring power to buy more of the prod- 



LABOR AND GENERAL PROGRESS 291 

ucts of others; and enlarging the general output of 
goods tends thus to increase the demand for all kinds 
of goods as well as the supply. If you make clothes 
and I provide food, and we exchange products, but 
do not satisfy each other's wants to the point of 
repletion, it is well for both of us that you should 
become able to make more clothes and I to furnish 
more food. We can then go on with our original 
occupations and both live better. In this there is 
involved no displacement of labor at all ; and neither 
would there need to be any disturbance caused by 
multiplying in well-adjusted proportions the output 
of each group and subgroup in the system of indus- 
try. Where formerly a unit of A'" was exchanged 
for one of B'" or C" , there are now two units of A'" 
given for two of either B"^ or C"', and every one has 
more things to consume than he formerly had.^ 

Labor attracted toward a Subgroup as a Result 
of Improvements which are made Elsewhere. — The 

^ It ■jvill be seen that the maintenance of the present ex- 
change ratios between A"', B'", C" , etc., when costs of all 
of them are reducing, would require that these costs be re- 
duced in exactly the same degree in each case, and that the 
quantities sold at the new cost prices should be increased 
in unequal degrees, so as to bring the different prices to cost 
levels. The demand for one article is more elastic than is 
the demand for another. A slight increase in the supply of 
A'" may cause a large reduction of the selling price, while 
it may require a great addition to the supply of B'" to pro- 
duce this effect. There must, therefore, be some changes 
in the relative quantities of labor in the different subgroups, 
even though there has been an equal amount of "labor sav- 
ing" or cost reducing in all of them. This change is so slight 
in amount as compared with what would be caused by im- 
provements confined to one subgroup, that it is effected 
with relatively little hardship and mainly by disposing the 
constant inflow of new labor at the points where it is needed. 



292 • ESSENTIALS OF ECONOMIC THEORY 

fact that the demand of consumers for different goods 
is not uniformly elastic has to be taken into account. 
There are two distinct kinds of movements in the group 
system, brought about by improvements in method. 
Each improvement in and of itself has, as a rule, a 
labor-expelling effect, but this effect is partly neu- 
tralized by general growth in consumption and still 
more by improvements occurring elsewhere. Labor 
that is thrown out of the A group would naturally go 
to group B, C, etc.; but if, as we have just seen, 
similar influences tend to expel labor from the B 
group and the C group, the labor may, for the most 
part, stay where it is, with the result that more of A"', 
B'" , and C" is offered to consumers. The in- 
creased output of one group is itself a means of re- 
taining labor in other groups, even though, thanks to 
mere methods, that involves making more of every 
other kind of commodity. 

The Supply of One Kind of Goods Equivalent to a 
Demand for Others. — There should be no difficulty 
in interpreting, in this connection, the traditional 
statement that "the supply of one kind of goods con- 
stitutes a demand for another." An increment of 
A'" and one of B"' coming into existence together 
supply wants common to their two sets of producers 
and both groups can gain by exchanging such portions 
of their respective products as they do not retain for 
their own use. If A''' and B'" were the only con- 
sumers' goods used, a part of the excess of each would 
be distributed among the members of the group pro- 
ducing it, and the remainder would be given in ex- 
change for some of the other kind of goods, also for 
distribution among the members of the first-named 
group. This is what actually happens when a mul- 



LABOR AND GENERAL PROGRESS . 293 

titude of articles for consumption are produced in 
increasing quantities. 

Effect of an Increase of Individual Incomes on the 
Character of Goods Consumed. — Such an increase of 
the productive power of a group means, of course, an 
increase of individual incomes, and it causes men, as 
we have seen, to consume better things rather than 
more of them. There is a certain merely quantitative 
enlargement of every one's consumption of goods 
of a given kind, every one using more of A'" than he 
used before; but the greatest change shows itself in 
the quality of what he uses. Every man buys and 
consumes better articles of the A'" kind, as well as 
of other kinds. His food, his clothing, etc., are all 
prepared in a more elaborate way, and he has more 
of what we call form utility which results from the 
fashioning of things, and relatively less of the elemen- 
tary utility which inheres in the raw material. There 
is somewhat more of raw material and very much 
more form utility in the goods he demands for per- 
sonal consumption. This requires that labor should 
move upward in the group system, and that more of it 
than before should betake itself to those subgroups 
where the fashioning of the raw material is done and 
where the finishing touches are applied to goods. 
The effect of the constant improvement of all pro- 
cesses of production, therefore, so far as the effect 
on labor is concerned, is akin to the effect of an addi- 
tion to capital, in that it moves labor upward in the 
subgroup series. It puts more labor into mills and 
shops which make articles of comfort and luxury. 

The Nature of the Movements actually caused by 
Im.provements. — This upward movement cannot go 
on as smoothly and with as little disturbance as that 



294 . ESSENTIALS OF ECONOMIC THEORY 

which is caused by the increase of capital. Whenever 
a greater gain is made at one point than is made at 
another, an influence is set working which, of itself, 
tends to send labor from the one point to the other. 
The slowness with which the change of method pro- 
ceeds affords the time that is necessary for the pro- 
tection of labor in the first-named group, since little 
movement takes place before the effects of improve- 
ments made in the second group begin to be felt. If 
in 1906 an improvement is made which, in the course 
of five years, would cause some labor to move from 
the subgroup A'" to the subgroup B'" ^ and in 1907 a 
corresponding improvement is made in the latter 
industry, the equilibrium is restored before enough 
disturbance has taken place to require any absolute 
reduction of labor in A'" . The facts are (1) that new 
laborers as they enter the field are drawn more to 
the upper subgroups than to the lower ones, — to 
the A!" and the B'" rather than to the A and the B 
of the two series, — and that in moving upward they 
are drawn at first more strongly toward B'" and later 
more strongly toward A'" . This is the nearly constant 
fact in industry and is the grand resultant of all the 
forces we have described — an upward flow that is 
continuous but does not follow strictly vertical hues. 
As young men — the sons of workers m A, B, C, and 
D, who might otherwise have remained in their fathers' 
occupation— mo veto the subgroups that stand higher 
in the several series, they first go in larger number 
toward B'" than toward A'", and later in larger number 
toward A'". There is a wavy movement toward the 
right and then toward the left in the steady flow of 
labor from the groups that create the raw material 
to those that impart to these materials the form utili- 



LABOR AND GENERAL PROGRESS 295 

ties which they need to fit them for service. An 
actual lessening of the number of workers in an entire 
group in consequence of an improvement in the 
method of production is practically unknown, and 
even a positive lessening of the number in a sub- 
group is exceedingly rare. 

Apparent Exceptions to the Rule. — Exceptions to 
this rule which are rather apparent than real will 
occur to every one. The discovery of a great supply 
of mineral oil put an end to the use of whale oil for 
illuminating purposes, though it allowed the whale 
fishery to survive on a reduced scale and produce oil for 
other purposes,. in so far as the rawest material, the 
whales themselves, were not exterminated. The ex- 
haustion of a supply of raw material was here a domi- 
nant fact, and the effects it produced may be again 
expected when mineral oil shall, in turn, become 
scarce. Men will move out of the subgroup produc- 
ing the crude oil, as nature forces them to do so, but 
their movement cannot be referred merely to improve- 
ment in the mode of extracting the oil or transporting 
and refining it. The fact which illustrates the rule 
we have stated is that while mineral oil drove whale 
oil out of the field as an illuminant, this did not re- 
duce the number of men in the general group which 
produces illuminating oil. More men were set work- 
ing in the oil fields than ceased working on the whal- 
ing ships. A new raw material was used in creating a 
similar finished product, and as the general industry 
which made this product grew larger rather than 
smaller, the total demand for labor in oil production 
was not lessened. This does not prove that old sailors 
did not suffer from the change. Young sailors could 
go to the oil fields or elsewhere, but men who were 



296 ESSENTIALS OF ECONOMIC THEORY 

not adaptable could not do so, and the hardship thus 
entailed is not to be overlooked. We are, however, 
forming a judgment of movements which pervade 
a vast industrial system, and we need most to know 
what is their grand resultant. If that were a gen- 
eral displacement of labor, causing increasing idleness 
and suffering, the system that involved this result 
would stand condemned. The general resultant is 
the opposite of this. 

A Drift of Labor toward Certain General Groups. — 
We have just noticed that movements of labor in the 
group system, caused by improvements in method, 
consist mainly in an upward flow of labor, accom- 
panied by irregular lateral movements, the labor 
drifting to the right or the left as it is more strongly 
attracted now to one point and now to another on the 
same horizontal plane. The general mass of it 
swerves now to the right and now to the left in its 
general ascending course, though none may be ac- 
tually expelled. This description of the drift of 
labor is too general even to describe all the perma- 
nent currents. Some entire groups produce only or 
chiefly luxurious goods, and to those there is the same 
drift of labor as there is to the upper subgroups of 
the general series. If there be a group of D's making 
an article which only the well-to-do can afford to use, 
it will swell in size and in the volume of its output 
from the same causes — improved methods and gen- 
eral enrichment — which cause A'", B'" , and C'" to 
outgrow A, B, and C. 

Displacements of Mature Laborers naturally tend- 
ing to Diminish. — When an improvement is made 
in one of the upper subgroups while the general flow 
of labor is toward these groups, the effect is not usually 



LABOR AND GENERAL PROGRESS 297 

to lessen the absolute number of workers in the upper 
subgroup where the improvement has been made, 
but merely to prevent it from getting a pro rata share 
of the labor that is moving upward toward this tier 
of subgroups from the lower ones. The change in 
the apportionment of the social laboring force be- 
tween the upper subgroups and the lower ones is 
made gradually, without violent transfers of particular 
men from point to point, and merely by directing to 
the upper subgroups a disproportionate number of 
young workers who are selecting their fields of em- 
ployment. In general, labor moves from point to 
point in the system without requiring many particular 
laborers to do so. As actual loss of places by persons 
of mature age is the chief evil connected with changes 
in methods of production, it is a most welcome fact 
that the influence which we are studying tends nat- 
urally to reduce the extent of it. 

The Discarding of Aged Laborers mainly caused by 
a Further Influence. — Quite apart from a demand 
for less labor at a particular point in the system, there 
may occur a discharging of men merely because of age 
and a substituting of younger men. In establish- 
ments where the pace is a rapid one men have thus 
to give place to young successors at an earlier age 
than the one at which men give place in other em- 
ployments. The effect of some machinery is to im- 
prove the chances of old men, while that of other 
machinery is to reduce them. A hghtening of toil 
and a shortening of the working day preserve men's 
powers and enable them to retain employment longer. 

The Natural Tendency perverted by Monopoly. — 
When hardships come on a large scale in consequence 
of a discharging of workers, they are chiefly due to an 



298 ESSENTIALS OF ECONOMIC THEORY 

abnormal influence which now shows itself in ugly 
and disquieting ways throughout the industrial sys- 
tem, that, namely, of monopoly. Reducing forces for 
the sake of curtailing production and raising prices 
is what does the mischief. This influence undoes at 
many points the beneficent effects of free competition 
and causes grave hardships to particular workers while 
affording no compensating gain to the consuming 
public. It portends evil for society as a whole as well 
as for the working classes, on which its hand may 
be heavily laid. In a perfectly natural system, in 
which competition would do all that pure theory at 
the outset of this study has assumed that it will do, 
the evil entailed by local improvements would be 
relatively small and the diffused benefits enormous. 
In proportion as the movement approaches steadiness 
and as gains are made, not by radical changes, now 
here, now there, and now elsewhere, with long in- 
tervals between them, but by smaller economies 
made nearly everywhere and in very quick succession, 
the cause of the hardship is reduced. There is less of 
violent expulsion of labor from its fields and more of 
a gradual drifting of labor rather than particular 
laborers from the subgroups that create elementary 
products to those which fashion them into fine and 
costly shapes. There is small hardship in the natural 
selection by new laborers of the employments where 
they are most needed, and there is often little in a 
transfer of a person who has tended a machine of 
one kind to a machine of a different kind. Instances 
there still are of manual skill brought to naught by 
the invention of a mechanical automaton that does 
the work more rapidly and accurately than the hand 
of man can do it ; and the worker who possesses this 



LABOR AND GENERAL PROGRESS 299 

skill must usually, in such cases, content himself with 
an employment where his more general aptitudes 
may stand him in good stead and insure him at least 
an average rate of pay. The special aptitude which 
he had for performing one operation counts for noth- 
ing; and this happens when, men who have worked in 
one department of a mill have to accept work in other 
departments of the same mill or in other employ- 
ments. 

A Workman's Specific Loss as compared with his 
Share of a Social Gain. — The test question in cases 
like these is whether the man is helped or harmed 
by the general effect of improvements, including not 
only the one which has caused him to change his 
occupation, but all others which have taken place since 
he began working. To this question there can be 
but one answer : in the course of a lifetime the balance 
is in favor of progress even in the case of the average 
victim of the movement, and it is overwhelmingly so in 
the case of others. What a man sacrifices when he 
is transferred from one machine to another is usually 
more than offset in a term of years by what he gains 
in consequence of the general increase in the producing 
power of labor. At the time of the displacement he 
suffers, but by its constant increase in wealth and 
productivity society more than atones for the injury. 
The goods that emerge from the mills are multiplied ; 
the share falling to labor, as that share is determined 
by the test of final productivity, grows steadily 
larger; and the men who have never served a long 
apprenticeship at anything, but have learned their 
present trades quickly and can learn new ones as 
quickly, are producing and getting far more than 
they could possibly get under a regime of skilled 



300 ESSENTIALS OF ECONOMIC THEOEY 

manual labor or of inferior machinery, and far more 
also than their successors will get hereafter if, by any 
calamity, mechanical inventions shall cease to be 
introduced and other product multipliers shall be 
barred from the field. The hope of working human- 
ity lies mainly in the continuance of the changes 
which give it a forever enlarging command over 
nature. Some classes might live comfortably with- 
out this, but for the worker it affords the main ground 
of hope for increasing comfort and a coming time of 
general abundance. 



CHAPTER XVIII 

CAPITAL AS AFFECTED BY CHANGES OF METHOD 

Labor Saving and Capital Concentrating. — There 
is a common impression that whatever saves labor 
usually requires an increase of capital in the industry 
where the economy is secured, and this impression 
is justified by the experience of the century follow- 
ing the invention of the steam engine and the early 
textile machinery. Hand spinning and weaving 
require small amounts of fixed capital, while the 
mills in which spinning and weaving are done by 
steam or water power require a great deal. For- 
tunately in any long period this capital comes as 
abundantly as it is needed from the profits of the 
very business that calls for it and does not reduce 
the capital of other industries. The profit of one 
year furnishes the new instruments required in the 
next; but the immediate effect of substituting 
a costly machine for hand labor is to concentrate 
capital, or to call it from places to which it would 
otherwise go. 

The Liberation of Capital by Invention. — For a 
long period it was the general rule that a mechanical 
invention at first called capital to the point at which 
it was applied, although it afterward created new 
capital and sent it away to make more than good 
the draft it originally made. This rule is no longer 
universally applicable. When an invention cheapens 

301 



302 ESSENTIALS OP ECONOMIC THEORY 

capital goods, it liberates capital. It is clear that 
a hundred and twenty-five years ago there was 
small chance that an invention would liberate very 
much capital by reducing the cost of making tools, 
buildings, rails, machinery, etc., since there were 
so few of them to cheapen. Now that machines 
are at hand in myriad forms the chance is large that 
an invention will substitute for many of them others 
of less costly construction. It will in these cases 
cause less capital to be required per machine than 
was formerly needed. 

Simplifying the Forms of Machinery and Cheapen- 
ing the Materials of It. — The history of invention 
shows that the early machines sometimes took 
cumbersome and expensive forms, for which simple 
and cheaper forms were later substituted. Much 
simplifying of mechanical appliances is all the while 
going on, and this, of course, liberates some capital. 
Making instruments of any kind out of cheaper 
materials has the same effect that anything has 
which reduces the cost of constructing the instru- 
ments. Bessemer steel has made rails, bridges, 
ships, buildings, steam boilers, and a vast number 
of mechanical tools and appliances less costly than 
they were, and so has liberated some of the capital 
which such things formerly embodied. After one 
of the machines of the costlier type has earned 
the fund on which its owner relies for replacing it 
as it is worn out, it appears that a part of this fund 
will suffice for procuring a perfectly good substitute 
for it, and the remainder may be used for procuring 
other appliances of production. 

Cheapening the Process of Making Instruments. — 
If we recur to the table which represents the groups 



CAPITAL AND CHANGES OF METHOD 303 



A"' 


B"' 


Qm 


H'" 


A'' 


B" 


G" 


H" 


A' 


B' 


C 


H' 


A . 


B 


G 


H 



of the industrial system, we shall see that improve- 
ments of- method in the general group H-H'" 
have the effect of liberating capital in the other 
groups and subgroups. W" is the comprehensive 
symbol that represents active instruments of all 
kinds. It is engines and boilers, looms and spindles, 
lathes and planers, rails, cars, bridges, tunnels, 
canals, ships, buildings, and all the myriad instru- 
ments which actively aid man in making the things 
he wants for consumption. New methods at H-H"' 
make the supply of all these things cheaper, which 
means that the labor and capital of the group H-H'" 
which would have been required for replacing the 
instruments used in the other groups will more than 
suffice for that purpose, and a part of their time 
may be given. to making machinery, etc., not for- 
merly -used. This amounts to liberating a part of 
the fixed capital in the three groups producing A"' , 
B"' , and C"' , although the free capital that is thus 
gained may in part be used in furnishing additional 
appliances for use in these same groups. 

Local Concentration of Capital which causes a 
General Liberation of It. — In such a case the new 
method used at H"' may, at its introduction, re- 
quire more capital than was formerly used at that 
point in the system. Building Bessemer converters 
was a costly operation, though the output of cheap 
steel afterward saved far more capital than the 
converters required. The power canals of Niagara 
cost something, but the products created by means 



304 ESSENTIALS OF ECONOMIC THEORY 

of them are cheapening many tools of industry; 
and hke effects follow most applications of electric- 
ity for utilizing waterfalls and carrying to great 
distances the power which they generate. They 
follow on a considerable scale as the culm of coal 
mines is economically burned and made to generate 
steam and drive dynamos. All cheapening of trans- 
portation, besides making consumers' goods cheaper, 
has the same effect on producers' goods, and by 
this means hberates capital. It causes a single 
productive appliance to cost less than it otherwise 
would cost and renders available for other purposes 
a part of the outlay that was formerly required for 
replacing it at the end of its industrial career. 

Effect of Speeding Machinery. — Increasing the 
speed of a machine is a capital-liberating opera- 
tion, since it enables a certain number of machines 
to do the work of a larger number. Running spindles 
and looms rapidly, while it requires fewer laborers 
for a given amount of product, requires fewer spindles 
and looms also. 

Cases in which Liberated Capital remains partly 
in the Same Industry in which it has been Used. — 
A distinction has carefully to be made between 
causing less capital to be used per unit of physical 
product, and causing less to be used in a particular 
occupation without regard to the amount of the 
product. If we cheapen the operation of cloth 
making, we shall increase the consumption of cloth, 
and in this way we may draw new capital into this 
business, even though we can build and equip a mill 
of a given capacity more cheaply than before. In 
this case we have liberated capital in this business 
and at once reemployed it at the same point. If 



CAPITAL AND CHANGES OF METHOD 305 

we use as many looms as before, the more rapid 
running calls for more spindles to furnish yarn, and 
the new spindles require larger engines and boilers, 
or more water wheels, wheel pits, and reservoirs, to 
furnish power. Enlarging a business in this way 
usually calls for an enlarged general capital in the 
industry, though it calls for less capital for a given 
output; and the striking fact is that this effect may 
be realized by means of devices which actually save 
capital at particular points in the industry. If, 
after power looms were introduced, some ihventive 
genius had made them cost only a quarter as much 
as on their first introduction they had cost, the 
profits of the business would have been increased 
and, in time, far more capital in the shape of spin- 
ning machinery, engines, etc., would have been 
required than had formerly been used in those 
forms. With general growth of population and 
wealth the increased consumption of cloth calls, 
in the end, for more capital in the form of the looms 
themselves. 

General Consumption as affected by a Specific 
Increase of Productive Power. — Consumption in 
the generic — the use of consumers' goods of every 
kind — grows as the power to make the good in- 
creases; but a point that is of great importance is 
that any specific increase of productive power brings 
about a general increase of consumption. It brings 
about a greater all-round creating and using of 
commodity. If we can hereafter make the A'" 
of our table with the expenditure of half as much 
labor and capital as we have heretofore used in 
creating it, the liberated agents of production be- 
come available for making whatever is most needed, 



306 ESSENTIALS OF ECONOMIC THEORY 

and they will, in fact, be used for increasing the 
supply of all three types of consumers' goods rep- 
resented in the table. They will give us more of 
A'" , B'", and C" in quantities adjusted by the laws 
of value. The outcome of this is that an economy 
in making A'" actually gives us more of A'", B'", 
and C". We become larger consumers of every- 
thing because of the cheapening of anything which 
enters into our list of articles for personal use. This 
presents a further aspect of the process of moving 
labor and capital from group to group, in which 
the possibility of hardship for particular persons 
inheres. The conclusion to which a fair weighing 
of the effects of mechanical progress has already led 
us is that there are very few, even of the workers 
who suffer displacements of this kind, who do not 
during their lives gain far more than they lose 
by general progress; and the effects of cheapening 
capital goods at one point, and so liberating capital 
for use at other points, increases this beneficent 
effect. The special costs of making the new kinds 
of machinery have been large in the earlier stages 
of the process, but have afterward grown smaller; 
and as machinery has come into general use the 
liberating of capital by the cheapening of the ma- 
chines has become a more- and more important 
factor. Some of the capital liberated at A goes to 
assist labor in furnishing the additional amount 
of B'" and C" which enlarged consumption requires. 
Hardships entailed on Capitalists hy Progress. — 
As the old handicrafts have now been largely sup- 
planted by machinery, and the hardship that con- 
tinuing progress entails on laborers is greatly re- 
duced, there is involved in progress a new burden 



CAPITAL AND CHANGES OF METHOD 307 

which falls altogether on the capitalist employer. 
The machine itself is often a hopeless specialist. 
It can do one minute thing and that only, and when 
a new and better device appears for doing that one 
thing, the machine has to go, and not to some new 
employment, but to the junk heap. There is thus 
taking place a considerable waste of capital in con- 
sequence of mechanical and other progress. As 
there have come into use marine boilers made 
of steel and capable of standing a very high pres- 
sure, the low-pressure boilers of former days have 
become useless. With the advent of triple expan- 
sion cylinders, twin screws, and better and larger 
hulls, ships of the old type lost their value; and 
similar things are occurring in every line of pro- 
duction. A new mill is built and equipped with 
the best machinery known at the date of its build- 
ing; but before a year has gone by all the machines 
in one department are so antiquated that it is 
best to throw them out. Indeed, a quick throwing 
away of instruments which have barely begun to 
do their work is often a secret of the success of an 
enterprising manager; but it entails a destruction 
of capital. What is easily to be seen is (1) that 
a single change of that kind makes an immediate 
draft on the general fund of available social capital; 
and (2) that this draft, as a rule, is soon repaid 
with increase. Machinery that is nearly new is 
thrown away when it appears that another kind 
soon will earn enough to make good the waste thus 
entailed, and the paradox is in the fact that the 
entrepreneur who quickly destroys capital really 
saves it, while he who, by using the old appliances, 
tries to hold on to the capital loses it, since he sac- 



308 ESSENTIALS OF ECONOMIC THEORY 

rifices profits from which more would have come. 
Running his antiquated engine, the unenterprising 
man has to content himself with small returns and, 
in the meanwhile, sees his actual productive fund 
dwindling by the deterioration of the old equipment. 
The Offset for Capital destroyed hy Changes of 
Method. — What has happened in such a case to 
the enterprising man is a loss of personal capital. 
What he has just paid for the supplanted instru- 
ments has gone for nothing. His financial status 
is improved rather than injured because of the 
prospective profits which the new appliances will 
earn. What has happened to the man who keeps 
the old machinery is a partial or total loss of what- 
ever he has lately put into it, not ofTset by such 
profits. By keeping his capital goods he is los- 
ing his capital without having his rival's assured 
prospect of regaining it. Whether the gains made 
by those who promptly discard antiquated appli- 
ances offset the wastes suffered by those who hold 
on to them too long, is a question that requires more 
space than can here be allotted to it ; but the follow- 
ing facts determine the answer : — 

(1) Instruments naturally at any one date are 
of an average age equal to about half their working 
duration. 

(2) Discarding all of one kind at any one date 
would involve drawing on the fund of social capital 
for about one half of the amount needed to replace 
these instruments. 

(3) Very few are at once discarded on the inven- 
tion of the improved types. 

(4) Nothing but a fall in the price of the product 
created by the aid of these old machines can pre- 



CAPITAL AND CHANGES OF METHOD 309 

vent them from earning the remainder of the fund 
required for replacing them. If they do this, they 
prevent any positive destruction of capital which 
many inventions cause. 

(5) When only one entrepreneur introduces the new 
appliance, his production is usually increased, but 
not to an extent that causes a quick fall in price. 
This affords to the users of old appliances whose 
plants are not already at the final point of ineffi- 
ciency a chance to continue accumulating the fund 
for replacement. The profits of the user of the 
better appliance are meanwhile accruing. 

(6) When all entrepreneurs introduce the new 
appliance at once they do so — provided that their 
act is intelligent — because the saving effected in 
the cost of production makes the change advan- 
tageous in spite of the waste entailed. They expect 
an all-round net profit during the period before 
the price of the product falls to its new level, and 
they expect that this will give them more than is 
required for interest, cost of future replacement of 
the superior instruments, and the deficit in the ac- 
counts caused by the early discarding of the super- 
seded appliances. 

(7) Without treating this prospective profit in- 
hering in the new appliance as capital, we must 
regard it as affording an assurance that new capital 
will soon appear. There are great gains to be made 
by using the new appliances, and some of these will 
add themselves to the permanent fund of productive 
wealth. 

(8) The cost of the new appliances may be de- 
frayed by their owner's earlier accumulations or 
by loans. In either case they come out of a social 



310 ESSENTIALS OF ECONOMIC THEORY 

fund that is created mainly by the apphances which 
in a preceding period have yielded special gains. 
The machine of to-day is paid for from the available 
surplus created by the machine of an earlier day, 
and a series of inventions enlarges the social fund 
of capital in spite of all wastes by which it is attended. 

The effect that a series of improvements has on 
the amount of social capital, if we measure the fund 
solely on the basis of the cost of the capital goods 
which embody it, may be represented thus : — 

The horizontal line 
a" , B'" measures time and 

y^ -^-^ ^ IS graduated m years 

from one to ten. The 

distance of the point 

above this base rep- 
resents the amount of capital as estimated in 
units of cost, in the possession of the society at 
the time a particular improvement is made, and 
would remain unchanged if society were static. 
The level of the line AB represents what, under 
such a condition, would be the capital of a dec- 
ade. The curved line AB' , dipping below AB 
and then rising above it, expresses the fact that 
a single important improvement first trenches on 
the amount of capital in use, and soon makes good 
the deduction and makes a positive addition. It 
raises the sum total of capital to the level of the 
latter part of the fine AB' . The curved line A'B" , 
first falling below A'B' and then rising above it, 
expresses the fact that a second improvement, 
made a year or two after the first one, makes a re- 
duction of the amount of capital as determined by 
the first improvement, and later adds more than 



CAPITAL AND CHANGES OF METHOD 311 

enough to make good this reduction. A third 
improvement, at the end of two or three further 
years, has the effect expressed by the hne A"B"'', 
that is, it first reduces the fund below the level at 
which at that time it would otherwise have stood, 
— but by no means to the level at which it stood 
when the series of improvements began, — and 
later carries it above the line expressing the highest 
level it would, without this improvement, have 
attained. In so far as these three improvements 
affect the level of the social capital for the ten-year 
period, it stands at the level indicated by the line 
AA'A"B"', and no later improvement, even at the 
time of its introduction, does more than to make 
a small reduction of the increment of capital ac- 
cruing from the products of the earlier improve- 
ments. A series of economical changes means a 
perpetual increase of the social capital as well as 
a perpetual improvement in the mode of applying 
labor. The increments of capital due to the earlier 
changes are far more than is required by the intro- 
duction of any later one. 

The Impossibility of Reducing Capital by too Rapid 
Progress. — There is a theoretical question whether 
this series might be too rapid to permit this result. 
If the interval were a month instead of several years, 
and if the amount of capital put into the new ap- 
pliances were the same that, in the figure, they are 
represented as requiring, the effect would be to make 
twelve deductions from the amount of the social 
capital in the course of a year, which would carry 
it some distance below its original level, while in 
this one year there would have been no time for the 
profits to accrue in order to restore and add to the 



312 ESSENTIALS OF ECONOMIC THEORY 

fund. In the next j^ear and the following ones 
this would follow, and the effect, in the course of ten 
years, would be to carry the social capital to a still 
higher level than the one it reaches in consequence 
of the slower succession of economical changes. 
Increasing the rapidity of productive inventions 
only multiphes the additions made to the social 
capital. 

We may summarize the chief facts concerning 
technical progress as follows : — 

(1) Progress may throw particular men out of 
their present employment, but cannot destroy the 
social demand for their labor. Somewhere in society 
there is a place for them. 

(2) If improvements were long confined to one 
subgroup, they might send labor into other sub- 
groups and even into other general groups. Oc- 
curring as they do at nearly all parts of the system, 
they very seldom require an absolute diminution of 
the amount of labor in a subgroup, and practically 
never cause such a reduction in a general group. 

(3) The gradual introduction of an improve- 
ment is important, since it affords time for an in- 
crease in the social demand for the product which 
is thus cheapened and for introducing at many other 
points improvements which neutralize, in a large 
degree, the labor-expelling effect of the first im- 
provement. 

(4) Technical gains are the largest source of ad- 
ditions to the total amount of the social capital. 
The constant influx of new capital facilitates the 
placing of laborers at the points where they ar.e 
needed. 

(5) The fact that elementary utilities which are 



CAPITAL AND CHANGES OF METHOD 313 

produced by agriculture cater to a less elastic demand 
than do the form utilities which are the product of 
manufacturing occupations, has caused labor to 
move slowly- from the lowest subgroups of the 
various series to the upper ones, as the productive 
power of labor in agriculture has increased. 

(6) This movement is so gradual that it can be 
accomplished almost entirely by devoting to the 
industries constituting the upper subgroups an 
enlarged share of new laborers as they enter the 
field in quest of employment. Young men drift 
from the farm to the village and the city. 

(7) In addition to the upward flow of labor in 
the series of subgroups there are some lateral move- 
ments, or transfers from group to group, to be 
taken into account. The fact that improvements are 
widely diffused and that there is a succession of 
them at each point makes it possible to make these 
lateral movements of labor in the same way in 
which the movement within the groups is accom- 
plished^ namely, by putting the new men who are 
entering the field of employment in the places where 
they are most needed. 

(8) These facts do not always prevent particular 
men from losing the special benefit that skilled handi- 
crafts have insured to them, since a machine, to the 
running of which they are compelled to betake them- 
selves, may often be as well tended by persons who 
have never learned such a handicraft. 

(9) The loss thus entailed on craftsmen was very 
large during the original process of supplanting hand 
labor by machinery, but bids fair to be relatively 
small hereafter, since fewer men go through long and 
costly apprenticeships, and since the operator of one 



314 ESSENTIALS OF ECONOMIC THEORY 

machine can usually learn to operate another with 
little waste of time. 

(10) Such injuries as particular men now suffer 
from the introduction of economical devices are, as 
a rule, more than atoned for even to these men by the 
greater productivity of social labor, as it is applied in 
new ways, and by the greater abundance of social 
capital. These gains are the result of improvements 
made in the earlier periods, and they benefit every one 
who labors. 

(11) The new capital created by productive inven- 
tions is an essential cause of the continuing gain of the 
working class. 

(12) While most inventions at first draw capital 
from the social fund to the point where they are ap- 
plied, many of them soon liberate capital by cheapen- 
ing particular appliances of production, and nearly 
all of them, by means of the profits they insure, ul- 
timately add to the social capital. 

The Vital Importance of Continued Improvement. — 
Intelligent study will make it clear to every one that 
any assertion that machinery is the enemy of labor is 
not merely erroneous, it is a contradiction of the most 
striking and important fact connected with general- 
progress. The gains of labor during the past century, 
which have been partly due to the occupation of 
areas of new land, have been largely due to the me- 
chanical inventions and technical discoveries which 
have put the forces of nature so largely at man's dis- 
posal. These forces have worked for all society, in- 
deed, but they have worked largely for the men who 
labor, whether in the factory, in the shop, on the 
railroad, or on the farm. Their effects are all-perva- 
sive, since they signify an increase in the productive 



CAPITAL AND CHANGES OF METHOD 315 

power of that final unit of social labor on which 
wages generally depend. General riches have been 
and must continue to be generally beneficent. As an 
isolated man- working, Crusoe-like, for himself alone, 
gains by every technical discovery he can make and 
by everything he can add to his stock of productive 
appliances, so society, the great and isolated organ- 
ism which is the tenant of our planet, reaps a benefit 
by every improvement it can make, and the forces 
of distribution see to it that this benefit is carried 
through and through the system and made to improve 
the condition of the most humble members. Since 
the great areas of new land are no longer available 
as a future resource, the hope of labor during the 
coming centuries, under any form of industrial or- 
ganization, whether it be competitive or socialistic, 
rests on the prospect of continued technical gains, — 
an unending succession of calls on the exhaustless 
serving power of nature. 

The Effect of Changes in the Relative Amounts of 
Labor -and Capital. — The law of wages, as stated in 
an early chapter of this work, makes it evident that 
an increase of population, while the social fund of 
capital remains the same, would reduce the product 
of marginal labor and therefore the rate of wages. 
In every establishrrient into which more workmen 
should come, while its capital remained the same in 
amount, the power of an individual worker to pro- 
duce goods would be lessened. Moreover, any influx 
of laborers into the society as a whole would be at- 
tended by a diffusion of them among all the groups 
and subgroups, so that the power of an individual 
laborer to create any kind of goods would be re- 
duced. This means that labor has lost some of its 



316 ESSENTIALS OF ECONOMIC THEORY 

power to create commodity, which is the concrete 
name for general wealth, and its wages fall accord- 
ingly. 

An influx of capital without any change in the 
number of laborers would have the opposite effect. 
It would add to the productive power of marginal 
labor. As the new capital should diffuse itself 
through the producing organism it would enlarge the 
product of workers everywhere. The wages of labor 
depend in part on a numerical ratio between units 
of capital and units of labor, as they cooperate in 
production: and the change in the ratio which 
enlarging capital causes improves the condition of 
the working people. The capital also diffuses itself 
throughout the system, every subgroup gets a 
share of it, and labor everywhere responds to this 
influence and produces more than before. In a 
change in this ratio — in a gain of per capita wealth 
in productive forms — lies one influence which has a 
great power over human destiny and is one main 
cause of weal or woe for coming generations. Method 
as it improves is related in two ways to this critical 
change in the ratio of capital to population. It is a 
prominent cause of the increase of capital. What 
men make by juggling with values and putting taxes 
on other men adds nothing to the aggregate wealth; 
but what they make by improved methods of pro- 
duction causes a net addition to it. The improve- 
ment in method also directly reenforces the influence 
of enlarging capital, by infusing productivity into 
labor and increasing its returns. 

The Resultant of the Five Dynamic Changes acting 
Together. — So long as the increase of capital more 
than offsets the increase of population, the ultimate 



CAPITAL AND CHANGES OF METHOD 



317 



result of all five of the general changes which charac- 
terize a dynamic state is to increase the well-being of 
laborers. The movement of labor from point to point 
in the system of industrial groups is a necessary means 
of securing the largest gain for society as a whole and 
of diffusing the benefit among all members. It is 
wage earners who are most numerous and most needy, 
and the greatest benefit which can be credited to any 
economic influence is that which takes the shape of a 
rise in wages. Moreover, an upward trend in the rate 
of pay is of far greater importance than the level of 
the rate at any one time. A system that should af- 
ford high present wages would stand condemned if it 
precluded all chance of higher ones hereafter; while 
a system that should begin with a low rate and afford 
a guaranty that it should grow higher each year to 
the end of time would have the most important 
merit which any system could possess. The outlook 
it would afford for humanity would far outweigh a 
measure of hardship imposed on the present gen- 
eration. A present purgatory with dynamic capa- 
bilities must in the end excel any earthly para- 
dise which is held fast in a stationary state. 

We may represent the resultant of the actual 
growth of population and of capital by the follow- 
ing figure : — 



HATE OF 
WAGES AT THE 
BEGINMNGOF 
THE CENTURY 



._FAUDU£TomCREASE„ 



D BATE OF 
OF WAGES AT 
THE END OF 

THE CENTURY 



8 9 10 



318 ESSENTIALS OF ECONOMIC THEORY 

Measuring time by decades along the horizontal 
base line and the rate of wages at the beginning of 
a century by the line AB, we represent the increase in 
the pay of labor which would be brought about by an 
increase of capital not counteracted by any other 
influence by the dotted line BC, and the reduction 
which would be caused by an increase of population 
by the dotted line BE. The line BD describes the 
resultant effect of these two changes acting together, 
on the supposition that during the latter part of the 
century the growth of population is somewhat re- 
tarded and that the increase of capital is the pre- 
dominating influence. 

We may further represent the change in the rate 
of wages which is caused by improvements in method 
and organization by lines rising above the one which 
expresses the trend of wages as it is affected only by 
an increase of capital and of population. 

AF measures 
time as before and 
AB the rate of pay 
at the beginning of 
the century. The 
dotted line BE rep- 
resents the rise in 
wages due to the 
increase of capital, 
as it more than counteracts the growth of popula- 
tion. The rise of the hne BD above 5^ represents 
the additional increase in wages which is brought 
about by improvements of method, and finally, the 
rise of BC above BD expresses the further addition 
to the pay of labor which comes by reason of im- 
proved organization. The uppermost line BC de- 




CAPITAL AND CHANGES OF METHOD 319 

scribes the resultant of all the dynamic changes on 
the supposition that they act in a natural way. 

It will be seen that BC at first rises above BD rap- 
idly and later runs nearly parallel with it. This 
expresses the fact that while gains insured by or- 
ganization may continue for a long period, the amount 
of them does not greatly increase after a fairly effi- 
cient type of organization has been secured. On the 
other hand, the fact that BD rises above BE by a 
wider and wider interval expresses the fact that 
gains which come from technical improvements may 
increase for an indefinitely long time. 

The Rate of Interest contrasted with the Absolute 
Amount of it; this Amount Increasing. — The changes 
which make wages rise cause interest to fall and 
there would seem to be a partial offset for the general 
gain; but the chief cause of a declining rate of in- 
terest is an increase of the total amount of capital. 
The size of the income which comes to the capitafists 
as a class from their entire invested wealth grows 
larger ,wherever the amount of the fund increases 
more rapidly than the rate of interest falls. A 
million dollars yielding four per cent gives a larger 
income than a half million yielding five or six. It is 
a condition such as this which we have described in 
outline, and it enables the holders of investments 
to receive a constantly increasing total return, 
although the percentage yielded by a given amount 
invested grows continually smaller. 

The Conditions of Increasing Future Well-being. — 
The realization of this resultant of all dynamic 
forces requires that the rate of growth of population 
should be subject to a natural check, that the increase 
of capital should not be unduly retarded, that tech- 



320 ESSENTIALS OF ECONOMIC THEORY 

nical improvements should go on, and that the or- 
ganization which is effected should be of the kind 
which makes for efficiency but not for monopoly. 
Competition must be kept alive. In altered ways, 
indeed, the essential power of it must forever dominate 
the industrial system, as it will do if the state shall 
do its duty and not otherwise. A dynamic society 
requires a dynamic government whose enlarging func- 
tions are shaped by economic conditions. 



CHAPTER XIX 



THE LAW OF POPULATION 



Since the optimistic conclusion reached in the 
preceding chapter is contingent on an increase of 
wealth which is not neutralized by an increase of 
population, it remains to be seen whether the popula- 
tion tends to grow at a rate that gives reason to fear 
such a neutralizing. Does progress in method and in 
wealth tend to stimulate that enlarging of the num- 
ber of working people which, in so far as they are 
concerned, would bring progress to an end? Is the 
dynamic movement self-retarding and will it neces- 
sarily halt? The answer to this question depends, 
in part, on the law of population. 

The Malthusian Law. — We need first to know 
whether the growth of population is subject to a law, 
and if so, whether this law insures the maintenance 
of the present rate of increase or a retarding of it. 
The law of population formulated by Malthus at the 
beginning of the last century is the single extensive 
and important contribution to economic dynamics 
made by the early economists. It was based more 
upon statistics and less on a priori reasoning than 
were most of the classical doctrines. Even now the 
statement as made by Malthus requires in form no 
extensive supplementing, and yet the change which 
is required is sufficient to reverse completely the orig- 
inal conclusion of the teaching. Malthusianism con- 

Y 321 



322 ESSENTIALS OF ECONOMIC THEORY 

stituted the especially "dismal" element in the early 
political economy, and yet, as stated by its author, it 
revealed the possibility of a comfortable future for 
the working class. One might look with cheerful- 
ness on every threatening influence it described 
if he could be sure that the so-called "standard of 
living" on which everything depends would rise. 
The difficulty lay in the fact that the teaching afforded 
no evidence that it would thus rise. The common 
impression of readers was that it was destined to 
remain stationary and that too at a low level. The 
workmen of Malthus's time were not accustomed 
to getting much more than the barest subsistence, 
and not many economists expected that they would 
get much more, even though the world generally 
should make gains. 

The Popular Inference from the Malthusian Law. — 
If we state the conclusion which most people drew 
from the Malthusian law in its simple and dismal form 
it is this: Whenever wages rise, population quickly 
increases, and this increase carries the rate of pay 
down to its former level. The earnings of labor 
depend upon the number of laborers; a lessening of 
the number of workers raises their earnings and an 
increase depresses them; and therefore, if every rise 
in pay brings about a quick increase of population, 
labor can never hold its gains ; every rise is the cause 
of a subsequent fall. 

Malthus's Qualification of his Statement. — As we 
have said, Malthus so qualified his statement that 
he did not positively assert that this would describe 
the experience of the future; the fall in pay that 
should follow the increase of numbers might not 
always be as great as the original rise, and when a 



THE LAW OF POPULATION 323 

later rise should occur the fall following it might be 
less than this second rise. In some way workers 
might insist upon a higher standard of living after 
each one of their periodical gains. 

Why this Qualification is not Sufficient. — The 
mere fact that the standard of living may conceiv- 
ably rise does not do much to render the outlook 
cheerful, unless we can find some good ground for 
supposing that it will rise and that economic causes 
will make it do so. We should not depend too much 
on the slow changes that education may effect, or 
base our law on anything that presupposes an im- 
provement in human nature. We need to see that in 
a purely economic way progress makes further progress 
easier and surer and that the gains of the working 
class are not self-annihilating but self-perpetuating. 
We may venture the assertion that such is the fact: 
that when workers make a gain in their rate of pay 
they are, as a rule, likely to make a further gain 
rather than loss. While there must be minor fluc- 
tuations of wages, the natural and probable effect of 
economic law is to make the general rate tend steadily 
upward, and nothing can stop the rise but perversion 
of the system. Monopoly may do it, or bad govern- 
ment, or extensive wars, or anarchy growing out of a 
struggle of classes ; but every one of these things, not 
excepting monopoly, would naturally be temporary, 
and even in spite of them, the upward trend in the 
earning power of labor should assert itself. Instead 
of being hopelessly sunk by a weight that it cannot 
throw off, the labor of the future bids fair to be buoyed 
up by an influence that is irrepressible. 

Refutations of Malthusianism. — The Malthusian 
law of population has been so frequently "refuted" as 



324 ESSENTIALS OF ECONOMIC THEORY 

to prove its vitality. It is in the main as firmly im- 
pressed in the belief of scientific men as it ever was, 
and some of the arguments which have been relied 
upon to overthrow it require only to be stated in 
order to be discarded. One of these is the claim that 
the statement of the law is untrue because, during the 
century in which the American continent, Australia, 
parts of Africa, and great areas elsewhere were in 
process of occupation, mankind has not actually 
pressed on the limits of subsistence. No intelligent 
view regards that fact as constituting anything but 
an illustration of the Malthusian law. A vast ad- 
dition to the available land of the world would, of 
course, defer the time of land crowding and the disas- 
trous results which were expected from it, but with 
the steady growth of population the stay of the evil 
influence would be only temporary. 

An Objection based on a Higher Standard of Living. — 
The second objection is also an illustration rather 
than a refutation of the Malthusian doctrine; it 
asserts that the standard of living is now higher than 
it was, and the population does not increase fast 
enough to force workers to lower it. Malthus's 
entire conclusion hung upon an if. The rate of pay 
conformed to a standard, and if that standard were 
low, wages would be so; while if it were higher, 
wages would be higher also. 

The Real Issue concerning the Doctrine of Popula- 
tion. — There is a real incompleteness in all such 
statements. Does the standard of living itself tend 
to rise with the rise of wages and to remain above its 
former level? When men make gains can they hold 
them, or, at any rate, some part of them, or must they 
fall back to the level at which they started? And 



THE LAW OF POPULATION 325 

this amounts to asking whether, after a rise in pay, 
there is time enough before a fall might otherwise be 
expected to allow the force of habit to operate, to 
accustom the men to a better mode of living and fore- 
stall the conduct that would bring them down to their 
old position. The standard of living, of course, will 
affect wages only by controlling the number of labor- 
ers, and the discouragement due to Malthusianism. 
lies in the fact that it seems to say that the num- 
ber of workers is foreordained to increase so quickly, 
after a rise in wages, as to bring them to their old 
level. Whether it does or does not do this is a ques- 
tion of fact, and the answer is a very clear one. The 
higher standards actually have come from the higher 
pay, and they have had time to establish themselves. 
Subsistence wages have given place to wages that 
provided comforts, and these again to rates that pro- 
vided greater comforts and modest luxuries ; and the 
progress has continued so long that, if habit has any 
power whatever, there is afforded even by the Mal- 
thusian- law itself a guarantee that earnings will not 
fall to their former level nor nearly to it. 

A Radical Change in Theory. — Progress is self- 
perpetuating. Instead of insuring a retrogression, it 
causes further progress. The man who has ad- 
vanced from the position in which he earned a bare 
•subsistence to one in which he earns comforts is, for 
that very reason, likely to advance farther and to 
obtain the modest luxuries which appear on a well- 
paid workman's budget. "To him that hath shall 
be given," and that by the direct action of economic 
law. This is a radical departure from the Malthusian 
conclusion. 

Three Possible Conditions for the Wage-earning 



326 ESSENTIALS OF ECONOMIC THEORY 

Glass. — Workers are in one of three possible condi- 
tions : — 

(1) They may have a fixed standard and a very 
low one. Whenever they get more than this stand- 
ard requires, they may marry early, rear large fam- 
ilies, and see their children sink to their own original 
condition. 

(2) They may have a fixed standard, but a higher 
one. They may be unwilling to marry early on the 
least they can possibly live on, but may do so as soon 
as their pay affords a modicum of comfort. . 

(3) They may have a progressive standard. There 
may be something dynamic in their psychology, and 
it may become a mental necessity for them to live 
better and better with advancing years, and to place 
their children in a higher status than they themselves 
ever obtained. 

A Historical Fact. — The manner in which Malthus 
was actually interpreted was as much due to the con- 
dition of workers in his day as to anything which he 
himself said. It was small comfort to know that, un- 
der the law of population, wages might conceivably 
become higher and remain so because of a higher 
standard of living, provided the higher standard was 
never attained. Facts for a long time were discourag- 
ing. In due time they changed for the better. The 
opening of vast areas of new land made its influence 
felt. It raised the pay of labor faster than the 
growth of population was able to bring it down. 
This had the effect of estabhshing, not only a higher 
standard, but a rising standard, and as one generation 
succeeded another it became habituated to a better 
mode of living than had been possible before. It 
was the sheer force of the new land supplemented 



THE LAW OF POPULATION 327 

by new capital and new methods of industry that 
accomphshed this. It pushed wages upward, in 
spite of everything that would in itself have pulled 
them down. • 

A Retarded Growth of Population. — If Malthusian- 
ism, as most people understood it, were true, popu- 
lation should increase most rapidly during this period 
of great prosperity, and should do its best to neu- 
trahze the effect of new lands, new capital, and new 
methods. In some places the increase has been ab- 
normally rapid, and in a local way this has had its 
effect; but if we include in our view the whole of 
what we have defined as civilized industrial society, 
the rate of growth has not become more rapid, but 
has rather become slower during this period. In one 
prosperous country, namely, France, population has 
become practically stationary. Even in America, a 
country formerly of most rapid growth, the increase, 
apart from immigration, has been much slower than 
it was during the first half of the nineteenth century. 
The growth of population, then, may proceed more 
slowly or come to a halt, even while wealth and 
earning powers are increasing. If this is so, a fur- 
ther accumulation of capital and further improve- 
ments in method will not have to struggle against 
the effects of more rapidly growing numbers, and 
their effects will become more marked as the decades 
pass. There will be a weaker and weaker influence 
against these forces which fructify labor and they will 
go on indefinitely, endowing working humanity with 
more and more productive power and with greater 
accumulations of positive wealth. Home owning, 
savings bank deposits, invested capital, and comfort- 
able living may be more and more common among 



328 ESSENTIALS OF ECONOMIC THEORY 

men who depend for their income mainly upon the 
labor of their hands. Is this more than a possibility ? 
Is there an economic law that in any way guarantees 
it ? Can we even say that general wealth will, with- 
out much doubt, redound to the permanent well- 
being of the working class, and that the more there is 
of this prosperity, the less there is of danger that they 
will throw it away by any conduct of their own ? The 
answer to these questions is to be found in a third 
historical fact. 

The Birth Rate Small among the Upper Classes in 
Society. — In most countries it is the well-to-do 
classes that have small families and the poor that 
have large ones. It is from the interpretation of this 
fact that we can derive a most important modifica- 
tion of the Malthusian law. It is the voluntary con- 
duct of different classes which determines whether 
the birth rate shall be large or small ; and the fact is 
that in the case of the rich it is small, in the case of 
the poor it is comparatively large, while in the case of 
a certain middle class, composed of small employers, 
salaried men, professional men, and a multitude of 
highly paid workers, it is neither very large nor very 
small, but moderate. In a general way the birth 
rate varies inversely as the earning power of the 
classes in the case, though the amounts of the varia- 
tions do not correspond to each other with any arith- 
metical exactness. If one class earns half as much 
per capita as another, it does not follow that the 
families belonging to this class will have twice as 
many children. They do, on the average, have 
more children. There is, then, at least an encourag- 
ing probability that promoting many men from the 
third class to the middle class would cause them to 



THE LAW OF POPULATION 329 

conform to the habit of the class they joined. This 
class is at present largely composed of persons who 
have risen from the lowest of the classes, and any 
future change by which the third class becomes 
smaller and the second larger would doubtless retard 
the average birth rate of the whole society. 

Motives for the Conduct of the Different Classes. — 
History and present fact are again enlightening in 
that they reveal the chief motive that determines the 
rapidity of the increase of the population. When 
children become self-supporting from an early age, 
the burden resting on the father when he has a com- 
paratively small number of them is as large as it ever 
will be. If they can earn all they cost when they reach 
the age of ten, the maintenance of the children will 
cost as much when the oldest child has reached that 
age as it will cost at any later time. Even though one 
were added to the family every year or two, one would 
graduate from the position of dependence every year 
or two, and the number constantly on the father's 
hands for support would probably not exceed five or 
six, however large the total number might become. 
The large number of children in families of early 
New England and the large number of them in 
French Canadian families at a recent date were due 
to the fact that land was abundant, expenses were 
small, and a boy of ten years working on the land 
could put into the family store as much as his main- 
tenance took out of it. The food problem was not 
grave in those primitive places and times, and 
neither were the problems of clothing, housing, and 
educating. It is in this last item that the key to a 
change of the condition lay, for the time came when 
more educating was required, when the burden of 



330 ESSENTIALS OF ECONOMIC THEOEY 

maintaining children continued longer, and a condi- 
tion of self-support was reached at no such early 
date as it had been in rural colonies. 

The Effect of Endowing Children with Education and 
with Property. — When children need to be thoroughly 
educated, the burden of maintaining a family of 
course increases. An unduly large family means the 
lowering of the present standard of living for all and 
a lowering of the future standard for the children. 
With most workmen it is not possible either to endow 
many children with property or to educate them in 
an elaborate way. The fear, therefore, of losing 
present comforts for the family as a whole and the 
fear of losing caste by seeing the family drop, at 
a later date, into a lower social class, are arguments 
against large families. 

Why Economic Progress perpetuates Itself. — The 
economic motive which causes progress to perpetuate 
itself and to bring about more and more progress is 
the determined resistence to a fall from a social status. 
The family must not lose caste. It must not sacrifice 
any of the absolute comforts to which it is accustomed, 
particularly when so doing entails a degradation. 
Such is human nature that the unwillingness to give up 
something to which one is accustomed is a far stronger 
spur to action than the ambition to get something to 
which one is not accustomed ; and a social rank once 
attained is not surrendered without a struggle. A 
tenacious maintenance of status is the motive which 
figures most prominently in controlling the growth of 
population and the increase of capital. The rich main- 
tain the status of the family by means of invested 
wealth, the poor do it by education, and members of 
the middle class do it by a combination of the two. 



THE LAW OF POPULATION 331 

Status maintained by Education. — In case of wage 
earners the need of educating children and the ad- 
vantages that flow from it overbalance the need of 
bequeathing to them property ; and yet the need of 
bequeathing property of some kind is a powerful 
motive also. It is important to enable them to pro- 
cure the tools of some handicraft, or to secure them- 
selves against dangers from sickness or accident. 
Moreover, it is not altogether technical education 
which counts in this way. Culture in itself is a means, 
not only of direct enjoyment, but of maintaining a 
social rank. The well-informed person accomplishes 
directly what a well-to-do person accomplishes in- 
directly, in that he gets direct pleasures from life 
which other people cannot get, and he enjoys con- 
sideration of others and has influence with them as 
an uninformed person cannot. The need, therefore, 
of educating children for the sake of making them 
good producers and the need of doing it for the pur- 
pose of making them good consumers and of enabling 
them to make the most of what they produce works 
against too rapid an increase of numbers. 

The Effect of Factory Legislation. — These motives 
are powerfully strengthened when they are reen- 
forced by public opinion and positive law. The am- 
bition of workers to secure laws which will forbid the 
employment of children under the age of sixteen is, 
in this view, a reasonable wish and one that if carried 
out would tend to promote the welfare of future 
generations. It is doubtless true that this is not the 
sole motive, and some weight must be accoMed to the 
desire to reduce the amount of available labor, and to 
protect adults who tend machines from the competi- 
tion of children who could do it as well or better. 



332 ESSENTIALS OF ECONOMIC THEORY 

There is, however, an undefined feeling in the la- 
borers' minds that when children all work from an 
early age the wages of the whole family somehow 
become low, and that it takes all of them to do for the 
family what the parents might do under a different 
condition. The Malthusian law shows how, in the 
long run, this is brought about. The increased 
strength of the demand for factory laws and com- 
pulsory education is a positive proof of the growth 
of the motives which put a check on population. 

Absolute Status and Relative Status both Involved. — 
The absolute comfort a family may enjoy and its social 
position are both at stake, and we need not trouble 
ourselves by asking whether the comparative motive 
— the need of keeping pace with others in the march 
of improvement — will cease to act if a whole com- 
munity advances together. We saw at the outset 
that this motive acts powerfully on a superior class, 
which has before its eyes a lower class into whose 
rank some of its members may possibly drop. The 
lowest class must always be present, however a com- 
munity may advance, and a well-to-do worker will 
always dread falling into it. If it should grow 
smaller and smaller in number, and if the second of the 
three classes we are speaking of should grow larger, 
the dread of falling from the one to the other would 
not disappear. The relative status — that which ap- 
peals to caste feeling and the desire for the considera- 
tion of others — would continue to be influential, as 
well as the desire for positive comforts ; and the mo- 
tive that depends on comparisons might even be at its 
strongest when the lowest class should so dwindle that 
few would be left in it except cripples, the aged, or the 
feeble-minded. An efficient worker would struggle 



THE LAW OF POPULATION 333 

harder to keep his family out of such a class than 
to keep it out of one which would have upon it only 
the ordinary stigma of poverty. 

Checks more Effective as Wealth Increases. — It is 
clear that the dominant motives which restrain the 
growth of population act more powerfully on the well- 
to-do classes than on the poor. The need of invested 
wealth, the need of education, the determination to 
adhere to a social standard of comfort and to avoid 
losing caste, are stronger in the members of the higher 
classes than in those of the lower ones, and become 
more dominant in the community as more and more 
of its members belong to the upper and the middle 
classes. 

Immediate Causes of a Slow Increase of Popula- 
tion. — The economic motive for a slow growth of 
population can produce its effect only as it leads 
to some line of conduct which insures that result. 
Means must be adopted for attaining the end desired, 
and when one looks at some of the means which are 
actually resorted to, he is apt to get the impression 
that an indispensable economic result is in some 
danger of being attained by an intolerable moral 
delinquency. Must the society of the future pur- 
chase its comforts at the cost of its character? 
Clearly not if the must in the case is interpreted 
literally. A low birth rate may be secured, not 
at the cost of virtue, but by a self-discipline that 
is quite in harmony with virtue and is certain to 
give to it a virile character which it loses when men 
put little restraint on their impulses. Late mar- 
riages for men stand as the legitimate effect of the 
desire to sustain a high standard of living and to 
transmit it to descendants; and late marriages for 



334 ESSENTIALS OF ECONOMIC THEORY 

women stand first among the normal causes of a 
retarded growth of population. Moreover, the same 
moral strength which induces men to defer mar- 
riage dictates a considerate and prudent conduct 
after it, and prevents unduly large families without 
entailing the moral injury which reckless conduct 
involves. On the other hand, there may be an in- 
definite postponement of marriage by classes that 
lack moral stamina and readily lapse into vice. 
There are vicious measures, not here to be named 
in detail, which keep down the number of births or 
increase the number of deaths, mostly prenatal, 
though the infanticide of earlier times is not extinct. 
By strength and also by weakness, by virtue and 
also by vice, is the economic mandate which limits 
the rate of growth of population carried out. A 
limit of growth must be imposed if mankind is to 
make the most of itself or of the resources of its 
environment. There is no great doubt that it will 
be so imposed, and the great issue is between the 
two ways of doing it; namely, that which brutalizes 
men and depraves them morally and physically, 
and that which places them on a high moral level. 
Moral Losses attending Civilization. — There is 
little doubt that vice has made gains which reduce 
in a disastrous way the otherwise favorable results 
of increasing wealth. The ''hastening ills" that are 
said to attend accumulating wealth and decaying 
manhood have come in a disquieting degree and 
forced us to qualify the happy conclusions to which 
a study of purely economic tendencies leads. The 
evil is not confined to the realm of family relations, 
but pervades politics, "high finance," and a large 
part of the domain of social pleasures. The richer 



THE LAW OF POPULATION 335 

world is the more sybaritic — self-indulgent and 
intolerant of many moral restraints; and if one 
expects to preserve an unquestioning trust in the 
future, he must find a way in which the economic 
gains which he hopes for can be made without a 
casting away of the moral standards which are in- 
dispensable. The greatest possible achievement in 
this direction would be an abandonment of vicious 
restraints on population and a general increase of 
the forethought and the self-command which even 
now constitute the principal reliance for holding 
the birth rate within prudent limits. 

The Working of Malthusianism in Short Periods 
as Contrasted with an Opposite Tendency in Long 
Ones. — There is little doubt that by a long course 
of technical improvement, increasing capital, and 
rising wages, the laboring class of the more pros- 
perous countries have become accustomed to a 
standard of living that is generally well sustained 
and in most of these countries tends to rise. There 
is also little uncertainty that a retarded growth 
of population has contributed somewhat to this 
result. One of the facts which Malthus observed 
is consistent with this general tendency. Even 
though the trend of the line which represents the 
standard of living be steadily upward, the rise of 
actual wages may proceed unevenly, by quick for- 
ward movements and pauses or halts, as the general 
state of business is flourishing or depressed. In 
"booming" times wages rise and in hard times they 
fall, though the upward movements are greater 
than the downward ones and the total result is a 
gain. 

Now, such a quick rise in wages is followed by an 



336 



ESSENTIALS OF ECONOMIC THEORY 



increase in the number of marriages and a quick fall 
is followed by a reduction of the number. The 
birth rate is somewhat higher in the good times than 
it is in the bad times. Young men who have a 
standard of income which they need to attain before 
taking on themselves the care of wife and children 
find themselves suddenly in the receipt of such an 
income and marry accordingly. There is not time 
for the standard itself materially to change before 
this quick increase of marriages takes place, and 
the general result of this uneven advance of the 
general prosperity may be expressed by the following 
figure : — 




The line AC measures time in decades and in- 
dicates, by the figures ranging from 1 to 10, the 
passing of a century. AB represents the rate of 
wages which, on the average, are needed for main- 
taining the standard of living at the beginning of 
the century; and CD measures the amount that is 
necessary at the end. The dotted line which crosses 
and recrosses the line BD describes the actual pay 
of labor, ranging now above the standard rate and 
now below it. Whenever wages rise above the 



THE LAW OF POPULATION 337 

standard, the birth rate is somewhat quickened, 
and whenever they fall below it, it is retarded; 
but the increase in the rate does not suffice to bring 
the pay actually down to its former level. The 
descent of the dotted line is not equal to the rise, 
and through the century the earnings of labor fluctu- 
ate about a standard which grows continually higher. 
The pessimistic conclusion afforded by the Mal- 
thusian law in its untenable form requires (1) that 
the standard of living should be stationary and low, 
and (2) that wages should fluctuate about this low 
standard. In this view the facts would be described 
by the following figure : — 




AC measures a century, as before, by decades, and 
the height of BD above BC measures the standard 
of living prevailing through this time. The dotted 
line crossing and recrossing BD expresses the fact 
that wages sometimes rise above the fixed standard 
and are quickly carried to it and then below it by 
a rapid increase in the number of the laborers. 

Members of the Upper Classes not Secure against the 
Action of the Malthusian Law if a Great Lower Class 
is Subject to It. — It is clear that if the workers are 
to be protected from the depressing effect which 
follows a too rapid increase of population, the Mal- 
thusian law in its drastic form must not operate 
in the case of the lowest of the. three classes, so 
long as that is a numerous class. A restrained 



338 ESSENTIALS OF ECONOM-IC THEORY 

growth in the case of the upper two classes would 
not suffice to protect them if the lowest class greatly 
outnumbered them, and if it also showed a rapid 
increase in number whenever the pay of its members 
rose. The young workers belonging to this class 
would find their way in sufficient numbers into the 
second class to reduce the wages of its members to 
a level that would approximate the standard of the 
lowest class. Under proper conditions this does 
not happen; for the drastic action of the Malthusian 
law does not take place in the case of the third 
class as a whole, but only in the case of a small 
stratum within it. 

Countries similarly exposed to Dangers from 
Other Countries. — Something of this kind is true 
of a number of countries which are in close com- 
munication with each other. If a rise of pay gave 
a great impetus to growth of population in Europe, 
and if this carried the pay down to its original level 
or a lower one, emigration would be quickened; 
and although the natural growth in America might 
be slower, the American worker might not be ade- 
quately protected. The influx of foreigners might 
more than offset the slowness of the natural growth 
of population in America itself. The most important 
illustration of this principle is afforded by the new 
connection which America is forming with the Asiatic 
nations across the Pacific. 



CHAPTER XX 

THE LAW OF ACCUMULATION OF CAPITAL 

Adam Smith and many others have noticed that 
the growth of capital varies with the intelligence 
and the foresight of a population. It should there- 
fore increase in rapidity as intelligence increases. 
A high valuation of the future is a mark of intel- 
ligence, and there is no reason why an entirely rational 
being should value a benefit accruing to himself in 
the future any less than he does a benefit accruing 
at once. Perfectly rational estimates of present 
and future, if there are no influences affecting the 
choice except these mere differences in time, mean 
that the two stand at par. It was once supposed 
that the disposition to save from one's present 
income varies directly as the rate cT interest of the 
capital which is thus accrued, and in the main 
this is still regarded as a nearly self-evident proposi- 
tion. Abstinence imposes a present cost on any- 
body that practices it. Whosoever saves a dollar 
misses the gratification which that dollar might 
bring. He may regard that sacrifice as fixed. It 
causes him to go without his marginal gratification, 
whatever that may be. If interest for a year amounts 
to twenty-five cents, the man has at the end of the 
year one dollar and twenty-five cents, with which to 
do whatever he may choose. He may spend it, if 
he will, and get all the gratification that a dollar and 

339 



340 ESSENTIALS OF ECONOMIC THEORY 

a quarter can bring. If interest stands at five per 
cent per annum, his abstinence will bring him only 
one dollar and five cents a year, and that, or what- 
ever he can get by means of it, is a smaller benefit 
than the one he could get for one dollar and a quarter. 
If it is barely worth while to go without something 
now in order to have a dollar and five cents in the 
future, it is more than worth while to do it in order 
to have a dollar and a quarter at the same future 
date. If a man is induced to save only a dollar, for 
the sake of having a dollar and five cents at the 
end of the year, why should he not save two dollars, 
in order to have two dollars and a half at that time ? 
Why should not the amount of his present privation 
increase, when the surplus of benefit he can gain 
by it at a future date grows greater? Such is the 
reasoning, and it seems entirely plausible, if we 
assume that what the man loses is the gratification 
he might have by spending his dollar, and that what 
he gains is the benefit of spending it and its accumu- 
lation of interest at the end of the year. The as- 
sumption is that the man proposes at a certain 
future date to spend the principal or the capital 
which he acquires by saving in the present, together 
with whatever it may have earned as interest; that 
he measures the personal benefit which he can get by 
this spending, and finds the larger benefit better 
worth a fixed sacrifice in the present than a small 
one. 

The Actual Purpose of Abstinence. — Most capital 
is saved with no expectation of ever spending the 
principal. The motive is a perpetual income, which 
the capital will earn. What the man appraises 
in his own mind is not the personal benefit he can 



THE LAW OF ACCUMULATION OF CAPITAL 341 

get by spending a dollar and five cents at the end 
of the year; it is the benefit that will come from 
spending five cents at the end of the first year, an- 
other five cents at the end of a second, and a more 
or less similar amount at the end of every year that 
shall follow. It is a perpetual income, and as the 
man's life is limited, the greater part of it must 
accrue to others than himself. The satisfaction 
which he will get from it near the close of his own 
life comes altogether from the prospect of passing 
the principal unimpaired to others and in assuring 
to them and to their successors the perpetual income 
which the foundation yields. 

Even on this basis it might be supposed that a 
large perpetual income would offer a greater induce- 
ment to save than a small one, and therefore that 
the amount of saving would be greater when the 
rate of interest was higher. This would be true if 
the importance of the perpetual income could be 
estimated in this simple way by the mere amount 
of it. , 

Conditions affecting the Importance of a Future 
Income. — The importance of a future income may 
be large because of the prospective helplessness or 
poverty of the one who expects to enjoy it, A 
workman may save at a great present cost to him- 
self in order to provide for old age or sickness, in 
which case the income from the savings, and often 
the savings themselves, would be the means of 
averting a great calamity. To make one's self 
secure against privation in the future is worth more 
than to add to one's comforts in the present. If 
a certain minimum amount were needed to avert 
starvation at the end of a man's life, he should 



342 ESSENTIALS OF ECONOMIC THEORY 

secure that amount at all hazards, however much 
that may trench on his present comforts. Now, 
as the amount which he can have at the end of his 
life depends largely on the rate of interest which 
his savings will earn, during such time as they may 
remain in a productive shape, it will take more 
positive abstinence on his part to keep himself from 
starvation when the rate of interest is low than it 
will when the rate is high. If there were no interest 
at all, he would have to put by from his income 
his entire old-age fund. If the rate were a hundred 
per cent per annum, taking a very small part of the 
fund out of the income of his active years would 
suffice, since the fund itself would earn the remain- 
der. Is the income which is provided for the future 
to be treated as a variable amount in addition to 
some other income, or is it to be regarded as a fixed 
amount, which is needed for some definite purpose? 
On the answer to this question depends the entire 
issue as to whether a low rate of interest or a high 
one affords the larger incentive for saving. 

Future Incomes More or Less Fixed usvxilly Needed. 
— Recent writers have called attention to the fact 
that in many cases saving has the providing of a 
definite future income in view. The owner of a 
landed estate, who intends to leave it to a son, may 
try to provide from his rents an endowment which 
will save from want or from an unhappy approach 
to want his daughters and his younger sons. He 
might accomplish this, indeed, without any pres- 
ent saving by putting rent charges or mortgages 
upon his land, but that would trench on the income 
which his heir can derive from it. It would reduce 
the establishment which the heir can maintain and 



THE LAW OF ACCUMULATION OF CAPITAL 343 

cause him to fall out of the class to which his father 
has belonged. Rather than do this, the present 
owner will usually reduce the present standard of 
living of the e-ntire family and try to make sure that 
its future standard shall not fall below the one thus 
established. It seems better to maintain the some- 
what lower standard through a series of generations 
than to make the present mode of living more lux- 
urious at the cost of unclassing one's self and one's 
heirs at a later date. 

This Fact heretofore Underestimated. — To the 
writers who have cited this familiar fact it appears 
to require merely a partial amendment of the general 
proposition that a high rate of interest insures more 
saving than a low one, and the inference which one 
naturally draws from this supposed fact is that 
growing wealth, as is still supposed, reduces the 
incentive for the accumulation of more wealth. 
Such an accumulation is an essential part of general 
progress and is practically necessary for sustaining the 
rate of wages. Here, then, if this supposition is true, 
we might see an important influence tending to bring 
progress to a standstill. Great wealth as the result 
of progress, a reduced motive for acquiring still 
further wealth, a retarding of progress — such 
would be the sequence. Dynamics would thus be, 
in a very important respecf, self-retarding if not 
self-halting. 

Future Standards of Living the Important Element. 
— The actual fact, as we may venture to affirm, 
is that the standards of living which need to be 
maintained in the future are the all-important 
element in the case. To the laboring man it is neces- 
sary to avoid starvation or the workhouse; to the 



344 ESSENTIALS OF ECONOMIC THEORY 

well-paid artisan it seems necessary to do this and 
to make for his children a provision which will keep 
them in the same class with himself. To the capi- 
talist who by successful business has raised himself 
above the artisan class it seems necessary to keep 
his children above the rank from which he has lifted 
the family; and the same principle applies to all 
the wealthier classes. The tenacity with which 
a man holds to a station in life outweighs his desire 
to add to his own present luxuries, and his ambition 
to keep his children in a certain station far out- 
weighs his desire to add to their present luxuries. 

The Importance of Future Standards not affected 
by the Fact that Men differ in Altruism. — This does 
not at all raise the question how many people care 
as much for their children as they do for themselves. 
That is not the principle at issue. In so far as men 
do care for their children the end they seek for them 
is to enable them to avoid what seems like a dis- 
aster, rather than to make positive gains in the way 
of comfortable living. Even in the case of those 
who have little altruism, such provision as they 
make for descendants is inspired by the desire to 
keep them within a certain class more than by any 
computation of how many comforts or luxuries 
a surplus income of any amount might give them. 
Whatever provision for children a selfish or dull 
person makes is dictated by the same motive that 
incites him to make provision for his own future, 
and in both cases it is chiefly the maintenance of 
a standard that he usually has in mind. 

The Principle not invalidated by the Fact that 
Forethought is often Weak. — All the motives for 
saving may be unduly weak. The man may care 



THE LAW OF ACCUMULATION OF CAPITAL 345 

far less for the future than he should do, and may 
make an unreasonably small provision for it. In- 
capacity to estimate the importance of this provi- 
sion, as well as the degree of selfishness which ex- 
cludes the exercise of self-denial for the benefit of 
others, are not the only reasons for this disregard 
of the future. There is an optimism which is natural ; 
and a religious faith which bids one not to take un- 
duly anxious thought for the morrow may occasion- 
ally be carried to the harmful length of justifying 
a neglect of coming years and their needs. An 
intelligent trust in Providence, however, incites 
a man to do his own full duty, and it is the better 
men who do the most to avert future evils from 
their families. The principle that we are maintain- 
ing applies as completely in the cases of those who 
make small provision for the future as it does in any 
others. In the majority of cases whatever they 
do save is set aside chiefly for the maintenance of 
some standard of living by those who get the benefit 
of it; and to maintain any standard whatever, 
whether high or low, requires a larger fortune when 
interest is low than it does when interest is high. 
Forethought limited in the Length of Time it Covers. 
— There is little danger that we make any mistake 
in ascribing to the dread of falling below a standard 
of living more influence on the accumulation of 
capital than any other motive exerts. This will 
be clearer if we look at the actual manner in which 
present and future are estimated and compared. 
The fact is not that most people care unduly little 
for all future benefits as compared with present 
ones, as it is that they throw off responsibility for 
all the future beyond a limited period. The per- 



346 ESSENTIALS OF ECONOMIC THEORY 

spective does not reduce the size of remote objects 
unduly as often as it cuts off the view of them al- 
together. In looking through coming years a man 
is subject to a certain economic myopia. One 
might compare what he sees with what a man sees 
in a foggy atmosphere, if it were not for the fact 
that the view of comparatively near objects is clear. 
It is as though a circle of fog surrounded him and 
cut off somewhat abruptly the view of everything 
that was far away. For a short distance the man 
sees everything with comparative clearness, but 
the limitless spaces that lie beyond he sees not at 
all. We have seen that the amount of abstinence 
he will practice now for the sake of what he or others 
will gain later varies as he is rational or foolish, 
unselfish or selfish, and it is also true that the length 
of his outlook into the future varies in the same 
way. There are all gradations of far-sightedness 
among those who create capital; but even com- 
paratively near-sighted ones usually provide for 
the maintenance of some standard or other during 
the period that falls within their range of vision, 
and this requires that they should save more when 
interest is low than they do when interest is high. 
Marginal Capitalists. — In this connection, how- 
ever, it is to be noted that economic myopia may 
go to the extreme length of making men nearly 
indifferent to all future standards. In this case 
they constitute an exception to the general rule, 
since whatever they save, if they save at all, is 
likely to be more when interest is high than when 
it is low. They are marginal capitalists, who are 
not influenced by any benefits except immediate 
ones and only inquire how much an investment 



THE LAW OF ACCUMULATION OF CAPITAL 347 

will, from the day when it is made, add to their 
own incomes. The higher rate is then the greater 
lure. Moreover, other capitalists, who are influenced 
mainly by regard for future standards of living, 
are somewhat affected by the immediate benefit 
which " marginal savers have exclusively in view. 
To the extent that they are so, the higher the 
rate of their immediate returns, the more strongly 
are they impelled to "abstain" and accumulate. 
The essential fact is that marginal capitalists are 
few numerically, and their savings count for little 
as they enter into the general fund, and that most 
capitalists, including nearly all who save great 
amounts, do it chiefly from a desire to maintain 
themselves and their descendants on an established 
level of living. In the main the social motives for 
saving are those we have described. 

Enjoyment largely Teleological. — There is a special 
reason why a rational man, if offered an enjoyment 
now or later, at his option, is quite likely to take it 
later. .Enjoyment is mainly teleological. It con- 
sists in a conscious approach to a desirable end. The 
knowledge that one's efforts to attain a desired goal 
are successful and that the good thing is really coming, 
sheds a light on the present. Indeed, it is anticipa- 
tion and memory which prolong any enjoyment, 
and of these anticipation is the more effective. The 
knowledge that one is at a certain time to sail for a 
foreign tour confers before the sailing an enjoyment 
which is often more than a foretaste. It often rivals 
the pleasure that is consciously taken in the trip 
itself. A man may be happy for years in the prospect 
of a business success or a prospect of election to a 
public office, and many years of hard labor in scien- 



348 ESSENTIALS OF ECONOMIC THEORY 

tific investigation may be illuminated by the expec- 
tation of the ultimate discovery and its consequences. 
There is a good reason why even an average man, as 
well as a wise one, will wish to distribute his expen- 
ditures over the different periods of his life, and to 
give a preference to the future whenever that is 
necessary in order to enable him to hold through his 
earlier years the comfortable assurance that his 
later ones are well provided for. 

^ F 



E— 



If the line AB represents by its distance above CD 
a fixed standard of living during a period of ten years, 
the highly rational man will prefer to take something 
from the enjoyments of the first five and bestow them 
on the second five. The consciousness of improve- 
ment, of the fact that every year will bring a new 
enjoyment never before experienced, makes the whole 
life brighter than it could be with any other disposition 
of the available means of pleasure. The man's stand- 
ard of living during the whole ten-year period will 
be represented by the rising dotted line EF. 

The Effect of Robbing the Future. — If a man pur- 
sued the opposite course, of taking something from 
the future to add to the desirableness of the present, 
thus establishing a falling standard of living, he would 
have to relinquish every year something to which he 
was accustomed, which would cause him a keen pain. 



THE LAW OF ACCUMULATION OF CAPITAL 349 

The very excessive gains of the present would thus 
become sources of unhappiness at a later period, 
while the anticipation of the later unhappinesses would 
throw a shadow over the present. The men who in 
spite of all this live recklessly and waste their present 
substance do so, not so much because they under- 
value so much of the future as falls within their 
purview, as because they are so extremely short- 
sighted that over nearly all of the future they have 
practically no vision at all. 

The Actual Conduct of a very Reasonable Man. — 
The real fact in the case of a reasonable man is repre- 
sented by the following figure : — 



Line EF measures fifty years and line FG another 
fifty. The heavy line AB, rising toward the right, 
represents the rising standard of living which the man's 
reason makes him maintain during the period over 
which his vision is clear, while the dotted line BC 
represents the standard for which, in an imperfect 
way, he makes provision during the next fifty years. 
Over later periods his vision does not extend at 
all. It loses clearness after the point B is passed, 
and in the same proportion it loses influence over 
the man's conduct. He therefore reconciles himself 
to whatever standard may prevail, even though it 
were a stationary one during the latter part of 
the time. Very seldom, however, would the man 



350 ESSENTIALS OF ECONOMIC THEORY 

consciously lower the standard even during this later 
period. 

The Effect of Limited Vision on the Valuation of a 
Per'petual Income. — This failure of vision, or economic 
myopia, accounts for the fact that the infinite series 
of payments of interest that a sum of invested capital 
will earn do not overbalance, in the man's estimate, 
the principal which he must refrain from spending in 
order to get them. If interest is at five per cent, ab- 
staining from using a hundred dollars for present 
pleasure will put into the man's hands, in twenty 
years, a sum equal to the principal, in twenty years 
more another like sum, and so on ad in^nitum. The 
man who considers whether he shall save a hundred 
dollars or spend it might be said to be comparing the 
importance of a hundred present dollars with that of 
an infinite number of future ones. In his conscious- 
ness the number is not infinite, because his vision 
does not extend over much of the future. The fact 
of most importance, as determining whether low 
interest causes small savings, is that in weighing the 
importance of the dollars which will be used during 
the period over which his vision ranges the average 
man is influenced by a desire to maintain some stand- 
ard of living, which involves the more saving, the 
lower the rate of interest. 

The Action of the Motive for Saving on Minds of 
Varying Degrees of Reasonableness. — Not only the 
man who looks a little way forward, but the man so 
constituted that he can content himself with a falling 
standard, is impelled to save more if interest is low 
than he is if interest is high, so long as he deems it 
necessary to maintain any standard at all ; but much 
importance still attaches to the question whether the 



THE LAW OF ACCUMULATION OF CAPITAL 351 

standard which the man hopes to maintain is a rising^ 
a stationary, or a falhng one. The average man, 
indeed, does hope to maintain at least a stationary- 
standard during so much of the future as he cares 
much about. This mode of distributing pleasures ap- 
pears in matters both small and great. In taking a 
walk for pleasure one is more likely to go up a rising 
grade first and descend afterward than he is to go down 
at first and afterward bear the fatigue of climbing. 
While there may be those who would rather play in the 
forenoon and work in the afternoon, when the choice 
is presented at the beginning of the day, there are 
certainly more among the classes that society depends 
on for capital who would put the work in the forenoon 
and the pleasure in the afternoon or evening. If a 
man were taking a canoeing trip on a swiftly flowing 
stream, he would paddle his boat up the stream and 
then come down with the current, rather than let it 
float down with the current and then paddle it back. 
If it be thought that this is true of only a specially 
rational mind, one may say that the capitalist class 
represents men who in this respect are more than 
ordinarily rational. They are generous, foresighted, 
and in their relation to descendants affectionate. The 
men who really do the saving for society have more 
to make them think and act in the intelligent way we 
have described than do ordinary men. The miser, 
the paragon of abstinence, can hardly be said to be 
the man who thinks too much of future enjoyments, 
for he contemplates no such enjoyments that call for 
spending money, for he never means to spend it. He 
is an abnormal type and fortunately a rare one. 
With him there is a standard of possessions to be 
maintained, rather than one of enjoyments, and it 



352 ESSENTIALS OF ECONOMIC THEORY 

is always a rising standard, since he cares for nothing 
so much as to see his possessions increasing. To 
make them increase at any given rate when the 
direct earnings of capital are small requires severer 
abstinence than it would if the capital yielded a 
larger return. 

The Effect of an Increase in the Number of Persons 
who seek to maintain a Rising Standard of Living. — ■ 
While it is true that even the half-evolved intellects 
that care little for coming years do, if they care for 
them at all, find themselves impelled to save more 
capital when interest is small than they do when 
it is large ; it is also true that minds of a high order 
save more than minds of a low one. In order to live 
during one's latter years just out of danger of the 
workhouse, one does not need to trench deeply on the 
comforts and pleasures which he is able to enjoy dur- 
ing the greater part of his life ; but if he is determined 
to live to the end of his days as well as he has done at 
any time and to help his children to do the same, he 
must practice a severer self-denial and accumulate 
a larger fund. Still sharper becomes the abstinence 
and still greater the accumulated fund where men pro- 
vide for a future mode of hving that shall surpass the 
present one. The importance of this fact lies in this : 
the condition which brings with it a low rate of in- 
terest does so because of the great number of men who 
do thus value a future standard of living that shall be 
at least stationary if not positively rising. The grow- 
ing size of the social capital implies a more general 
appreciation of the importance of future well-being. 
Because men's economic psychology has become what 
it is and because it is still changing for the better there 
is a second reason for expecting that the accumulation 



THE LAW OF ACCUMULATION OF CAPITAL 353 

of capital will not hereafter be retarded. We make 
here no extravagant claim as to the number of persons 
in a community who take the more rational views as 
to present and future. The number of each class is 
what it is; but facts show that the maintenance of 
some standard is the most efficient motive for saving 
in the case of each one of them, and that low interest 
therefore calls for large accumulations. They do 
show that the number who take the more rational 
views is a growing class, that they accumulate more 
than other classes, and that every addition to their 
relative number makes for more rapid accumulation 
within the society of which they are members. Two 
decisive reasons, then, exist for thinking that the 
growth of capital will never end or check further 
growth. There are still further facts, however, 
which have a bearing on this problem. 

The Importance of the Character of the Increases 
which are the Largest Sources of Accumulation. — If 
one has a doubt whether the large sums which enter 
into the capital which is steadily accumulating are 
saved under the influence of a desire to maintain a 
standard, this doubt will be removed by a considera- 
tion of the source from which great accumulations 
come. They come most largely from the net profits 
of the entrepreneur. Next to that they come from 
the earnings of what must be classed as labor, though 
much of it is labor of a special and very superior 
sort. The salary which the head of a corporation 
receives, the fees that its lawyers get, the fees that 
come to eminent surgeons or engineers, are all pay- 
ments for labor ; and these, taken together with the 
earnings of well-paid artisans, successful farmers, and 
very many others, constitute the second contribution 

2a 



354 ESSENTIALS OF ECONOMIC THEORY 

to accumulating capital. Savings from simple inter- 
est itself constitute the third contribution/ 

Now, of these sources of income, net profits and the 
wages of superior labor are transient, and the profits 
are particularly so. The man whose mill earns fifty 
per cent in a particular year would be foohsh in the 
last degree if he used all that as income. That would 
mean brief and riotous enjoyment, followed by a most 
painful fall from the standard so established. He 
will naturally spend some part of the phenomenal divi- 
dend and lay aside enough of it to afford a guarantee 
that his future income will not fall below the present 
one. The man who during the best years of his work- 
ing life enjoys a salary or professional fees amounting 
to a hundred thousand dollars a year would be almost 
equally foolish if he were to spend it all as he earns it, 
leaving his family unprovided for and his own later 
years exposed to the pains of sharp retrenchment. 
Transient incomes suggest to every one who has any 
degree of reason the need of establishing and main- 
taining some future standard of living, and of in- 
vesting enough to accomplish this. This is more 
true, of course, when the rate of interest is low. 

The Importance of the Need of Enlarging a Business. 
— There is a special reason why legitimate business 
profits are morall}^ certain to be to a large extent laid 
aside for investment. The man would say that he 
"needs them in his business." They come at a time 
when there is an inducement to enlarge the scale of 
his profitable operations. The man who is getting a 
dividend of fifty per cent per annum must make hay 

' Gains which come from holding land which rises in value 
more rapidly than the interest on the price of it accumulates, 
is to be rated as part of net entrepreneur's profits. 



THE LAW OF ACCUMULATION OF CAPITAL 355 

while the sun shines, and he can do it by doubling the 
capacity of his mill. What he makes and what he 
can borrow he uses for an increase of his output, which 
it is important to secure during the profitable time. 
All this means a quick increase of the total capital in 
existence. 

The profits of a monopoly are not transient, but 
are likely to be both long-continued and large, and it 
might seem that they would constitute a larger 
source of addition to capital than those profits which 
come from technical improvement. There are several 
reasons why this is not the fact. In the first place, 
what we are discussing is the addition that profits 
make to the total capital of society, rather than to the 
capital of any one person or corporation. The monop- 
oly makes its gains by taking something' from the 
pockets of the general public, and in so far it reduces 
the power of the general pubhc to save. 

It might be alleged, however, that since a monopoly 
reduces wages and interest, adds to profits, and creates 
enormous incomes for a few persons, it really di- 
verts income from a myriad of persons who would 
save very little of it, and puts it into the pockets of a 
few persons who are likely to save a great deal of it. 
This might conceivably add to the capital of society 
were it not for the fact that the more secure and regular 
gains of monopolies are made the basis of large capi- 
talization. A company that earns twenty-five per 
cent of its real capital per annum may have its stock 
diluted with four parts of water and pay only five 
per cent in dividends on its capitalization. This looks 
like interest and is apt to be treated as such by those 
who receive it. It is, therefore, not a more favorable 
income from which to make accumulations of capital 



356 ESSENTIALS OF ECONOMIC THEORY 

than is the interest on real capital. The sudden gains 
which promoters and manipulators of consolidated 
companies make are, indeed, transient gains and may 
be largely added to capital. The introduction of 
a regime of monopoly may insure a period of much 
saving by the class that profits by it; but the later 
career of the monopoly is unfavorable to the growth 
of capital. 

The Special Effect of a Prospective Fall in the Rate 
of Interest. — • If interest which continues steadily 
at a low rate affords an especially strong incentive for 
saving, it follows that a falling rate, one that begins 
low and steadily becomes lower, affords a still stronger 
one. The average rate during the years of the future 
for which a prudent man makes provision is made, 
of course, lower than it would be if the rate were sta- 
tionary. This influence is probably not as effective 
as it would be if the remote future were included in 
the view of those who are securing capital. On ac- 
count of the near-sightedness to which attention has 
been called, a rate of interest that begins at four per 
cent and falls very slowly to three and a half presents 
to those who have this defective vision the same in- 
centive to saving as one that begins at four per cent 
and remains steadily at that figure. What is true, 
however, is that a falling rate is to be expected, that 
this fact acts as a stimulus for saving in the case of the 
more far-sighted classes, and that the number of per- 
sons in these classes is increasing. 

In so far as the increase of capital is concerned 
society is secure against the danger of reaching a sta- 
tionary state. Progress in wealth will not build a 
barrier against itself by stinting the resources on 
which hereafter labor must rely. When we exam- 



THE LAW OF ACCUMULATION OF CAPITAL 357 

ine the sources from which capital mainly comes, we 
shall further test the probability that the instrumen- 
talities which add productive power to human effort 
will increase through the longest period that science 
needs to take account of.^ 

^ For a somewhat similar view of the effect of a fall of in- 
terest on the accumulation of capital, see Webb's " Industrial 
Democracy," Vol. II, pp. 610-632. 



CHAPTER XXI 

CONDITIONS INSURING PROGRESS IN METHOD AND 
ORGANIZATION 

The Possibility of a Law of Technical Progress. — 
It might seem that inventions were not subject to 
any influence that can be described under the head 
of a law. Genius certainly follows its own devices, 
and inventive power that has in it any touch of genius 
may be supposed to do the same. It is, however, a 
fact of experience that some circumstances favor and 
increase the actual exercise of this faculty, while 
other influences deter it. Moreover, what is im- 
portant is not merely the making of inventions, but 
the introduction of such of them as are valuable into 
the productive operations of the world. Some in- 
fluences favor this and others oppose it, and it is en- 
tirely possible to recognize the conditions in which 
economies of production rapidly take place in the 
actual industry of different countries. 

Technical progress has been particularly rapid in 
the United States, though in this respect Germany 
has in recent years been a strong rival, and ever since 
the introduction of steam engines and textile ma- 
chinery, England has continued to make a brilliant 
record. France, Belgium, and a number of other 
countries of Europe have developed an industry that 
is in a high degree dynamic, and Japan is now in the 
lists and giving promise of holding her own against 
the best of her competitors. The question arises 

368 



LAW OF TECHNICAL PROGRESS 359 

whether it is something in the people, or something in 
their natural and commercial environment, which 
makes differences between their several rates of prog- 
ress. 

Inventive Abilities widely Diffused. — In so far as 
originating important changes is concerned, mental 
alertness and scientific training without doubt have a 
large effect. Some races have by nature more of the 
inventive quality than others, but within the circle 
of nations that we include in our purview no one has 
any approach to a monopoly of this quality. Any 
people that can make discoveries in physical science 
can make practical inventions, and will certainly do 
so if they are under a large incentive to do it. 
Moreover, alertness in discovering and duplicating 
the inventions of others is as important in actual 
business as originating new devices. At present it is 
a known fact that the Germans not only invent 
machinery, but quickly learn to make and to use 
machinery that originates elsewhere and demon- 
strates its value in reducing the cost of the produc- 
tion; and the remote Japanese have not only 
surpassed all others in the quick adoption of eco- 
nomic methods that have originated in Western 
countries, but have put their own touch upon them 
and revealed the existence of an inventive faculty 
that is likely to make them worthy rivals of Occi- 
dental races. 

The Importance of Inducements to make and use 
Inventions. — Granted a wide diffusion of inventive 
ability, the actual amount of really useful inventing 
that is done must depend on the inducement that is 
offered. Will an economical device bring an ade- 
quate return to the man who discovers it and to the 



360 ESSENTIALS OF ECONOMIC THEORY 

man who introduces it into productive operations? 
If it will, we may expect that a brilliant succession of 
such devices will come into use, and that the power 
of mankind to bend the elements of nature to its 
service will rapidly increase. 

The Usefulness of a Temporary Monopoly of a New 
Device for Production. — If an invention became public 
property the moment that it was made, there would 
be small profit accruing to any one from the use of it 
and smaller ones from making it. Why should one 
entrepreneur incur the cost and the risk of experi- 
menting with a new machine if another can look on, 
ascertain whether the device works well or not, and 
duphcate it if it is successful? Under such condi- 
tions the man who watches others, avoids their losses, 
and shares their gains is the one who makes money; 
and the system which gave a man no control over the 
use of his inventions would result in a rivalry in 
waiting for others rather than an effort to distance 
others in originating improvements. This fact affords 
a justification for one variety of monopoly. The 
inventor in any civilized state is given an exclusive 
right to make and sell an economical appliance for a 
term of years that is long enough to pay him for 
perfecting it and to pay others for introducing it. 
Patents stimulate improvement, and the general prac- 
tice of the nations indicates their recognition of this 
fact. They all give to the inventor a temporary mo- 
nopoly of the new appliance he devises, but this 
monopoly differs from others in this essential fact: 
the man is allowed to have an exclusive control of 
something which otherwise might not and often would 
not have come into existence at all. If it would not, 
— if the i)atonted article is something which society 



LAW OF TECHNICAL PROGRESS. 361 

without a patent system would not have secured at 
all, — the inventor's monopoly hurts nobody. It is 
as though in some magical way he had caused springs 
of water to flow in the desert or loam to cover barren 
mountains or fertile islands to rise from the bottom 
of the sea. His gains consist in something which no 
one loses, even while he enjoys them, and at the ex- 
piration of his patent they are diffused freely through- 
out society. 

Possible Abuses of the Patent System. — It is of 
course true that a patent may often be granted for 
something that would have been invented in any 
case, and patents which are granted are sometimes 
made too broad, and so cover a large number of ap- 
pliances for accomplishing the same thing. In these 
cases the public is somewhat the loser; but for the 
reasons about to be given this loss is far more than 
offset by the gain which the system of patents brings 
with it. 

The gains of the inventor cannot extend much 
beyond the period covered by his patent, unless some 
further and less legitimate monopoly arises. If the 
use of an important machine builds up a great corpora- 
tion which afterward, by virtue of its size, is able to 
club off competitors that would like to enter its field, 
the public pays more than it should for what it gets ; 
and yet even in these cases it almost never pays more 
than it gets. The benefit it derives is simply less 
cheap than it ought to be. Much of the power of the 
telephone monopoly has been extended beyond the 
duration of its most important patent, and that 
patent was in its day broader than it should have been ; 
and yet there never was a time when the use of the 
telephone in facilitating business, and in saving time 



362 ESSENTIALS OF ECONOMIC THEORY 

and trouble in a myriad of ways, did not far outweigh 
the total cost which the users of telephones incurred. 
As we shall soon see, important inventions invariably 
confer some benefit on the public at the start. The 
owner of the new device must find a market for his 
products, and must offer them on terms which will 
make it for the interest of the public to use them 
largely. 

The Effect of Competition in Causing Improvements 
to Multiply. — Competition insures a large number 
of inventors and offers to each of them a large induce- 
ment to use his gifts and opportunities. A great cor- 
poration may employ salaried inventors and, because 
of its great capital and large income, it may ex- 
periment with inventions with far less risk to itself 
than an inventor usually takes. When large cor- 
porations compete actively with one another, the em- 
ployment of salaried inventors is very profitable to 
them; and improvements in production go on more 
rapidly than they are likely to do after these firms 
consolidate with each other and cease to feel the 
spur which the danger of being distanced in a race 
affords. It is a fact of observation, and not merely 
an inference, that monopolies are not as enterprising 
as competing companies. 

Effects of Monopoly on the Spirit of Enterprise. — 
In monopolies, theoretically, there is the same induce- 
ment to adopt inventions as in the case of competing 
firms, excepting always the motive of self-preser- 
vation. The monopoly can make money by improve- 
ments as competing firms would do. A perfectly in- 
telligent monopoly, with disinterested management^ 
would adopt an improvement offered to it as promptly 
as any competing firm, if the sole motive were profit. 



LAW OF TECHNICAL PEOGRESS 363 

There is no reason why an intelligent monopoly should 
hold on to antiquated machinery, when modern ma- 
chinery would enable it to stand the cost of intro- 
duction and make a net improvement besides. A 
competing producer gains an advantage over his rivals 
by discarding old machinery and adopting new at 
exactly the right time, neither too late nor too early. 
The true point of abandonment of the old machine, as 
we have already seen, is reached when the labor and 
capital that now work in connection with it can make 
a shade more by casting it off and making a combina- 
tion of a better kind ; and this rule applies to monop- 
olies as well as to competitors. At just the point 
where a competitor can gain an advantage over rivals 
by modernizing his appliances, the monopoly can 
make money by doing so. 

An important fact is that the monopoly has as a 
motive the making of profits for its stockholders. 
Not only is that a less powerful motive than self- 
preservation, but it appeals largely to persons who 
are not themselves in control of the business. Ab- 
sentee ownership is the chief disability of the monop- 
oly. Managers may have other interests than those of 
large dividend making, and in such cases a monopoly 
is apt to wait too long before changing its appliances. 
It needs to be in no hurry to buy a new invention, and 
it can make delay and tire out a patentee, in order 
to make good terms with him; and this practice 
affords little encouragement to the independent in- 
ventor. On the whole, a genuine and perfectly 
secure monopoly would mean a certain degree of 
stagnation where progress until now has been rapid. 

Why the Public depends on Competition for Securing 
its Share of Benefit from Improvements. — Another 



364 ESSENTIALS OF ECONOMIC THEORY 

question is whether the two systems, that of com- 
petition, on the one hand, and monopoly, on the other, 
confer equal benefits on the public by virtue of the 
improvements they make. Competition does this 
with the greatest rapidity. As we have seen, it 
transforms the net profits due to economies into in- 
crements of gain for capitalists and laborers through- 
out all society. The wages of to-day are chiefly the 
transformed profits of yesterday and of an indefinite 
series of earlier yesterdays. The man who is now 
making the profits is increasing his output, supplant- 
ing less efficient rivals, and giving consumers the ben- 
efit of his newly attained efficiency in the shape of 
lower prices of goods. In practice rivals take turns 
in leading the procession; now one has the most 
economical method, now another, and again another; 
and the great residual claimant, the public, very 
shortly gathers all gains into its capacious pouch 
and keeps them forever. 

Would a secure monopoly do something like this? 
Far from it. It would be governed at every step by 
the rule of maximum net profits for itself. Its output 
would not be carried beyond the point at which the 
fall in price begins really to be costly. The lowering 
of the price enlarges the market for the monopoly's 
product and up to a certain point increases its net 
gains. Beyond that point it lessens them. 

Now, even the interest of the monopoly itself would 
lead it to give the public some benefit from every econ- 
omy that it makes. This is because the amount of 
output that will yield a maximum of profit at a cer- 
tain cost of production is not the same that will yield 
the maximum of net profit when the cost is lower. 
Every fall in cost makes it for the interest of the 



LAW OF TECHNICAL PROGRESS 



365 




monopoly to enlarge its output somewhat, but by- 
no means as much as competing producers would en- 
large theirs. It will always hold the price well above 
the level of cost. 
In the accompany- 
ing figure distance 
along the line AK 
represents the 
amount of goods 
produced, while ver- 
tical distance above 
the line measures 
costs of production, 
as well as selling 
prices, and the de- 
scending curve FJ represents the fall of prices which 
takes place as the output of the goods is increased. 
Now, when the cost of production stands at the level 
of the line CI, the amount of output that will yield the 
largest amount of net profit is the amount represented 
by the length of the line AM. That amount of prod- 
uct can be sold at the price represented by the line 
MG. The gross return from the sale will be ex- 
pressed by the area of the rectangle AEGM, and the 
area CEGN, which falls above the line of cost, CI, is 
net profits. They are larger than they would be if 
the line MG were moved either to the right or to the 
left, i.e., if the amount of production were made 
either larger or smaller. Now, if the cost of produc- 
tion falls to the level of the line BJ, it will be best to 
increase the output from AM to AL. The whole 
return will then be represented by the rectangle 
ADHL, and the area BDHO represents profits, with 
the cost at the new and lower level. These are some- 



366 ESSENTIALS OF ECONOMIC THEORY 

what larger than they would be if the output con- 
tinued to be only the amount AM. Under free 
competition the price would fall to the line BJ, the 
net profits would disappear, and the public would 
have the full benefit of the improvement in production. 

The Purpose of the System of Patents. — Patents 
are a legal device for promoting improvements, and 
they accomplish this by invoking the principle of 
monopoly which in itself is hostile to improvement. 
They do not as a rule create the exclusive privilege 
of producing a kind of consumers' goods, but they 
give to their holders exclusive use of some instru- 
mentality or some process of making them. The pat- 
entee is not the only one who can reach a goal, — the 
production of a certain article, — but he is the only 
one who can reach it by a particular path. A patented 
machine for welting shoes stops no one from making 
shoes, but it forces every one who would make them, 
except the patentee or his assigns, to resort to a less 
economical process. 

Patents Limited in Duration indispensable as 
Dynamic Agents. — If an inventor had no such 
protection, the advantage he could derive would be 
practically nil, and there would be no incentive what- 
ever for making ventures except the pleasure of 
achievement or the honor that might accrue from it. 
In the case of poor inventors this would be cold com- 
fort in view of the time and outlay which most inven- 
tions require. Not only on a priori grounds, but on 
grounds of actual experience and universal practice, 
we may say that patents are an indispensable part of 
a dynamic system of industry. It is also important 
that the monopoly of method which the patent gives 
should be of limited duration. If the method is a 



LAW OF TECHNICAL PROGRESS 367 

good one and the profit from using it is large, the 
seventeen years during which in our own country a 
patent may run affords, not only an adequate reward 
for the inventor, but an incentive to a myriad of other 
inventors to emulate him and try to duplicate his 
success. Ingenious brains, which are everywhere at 
work, usually prevent the owners of a particular 
patent from keeping any decisive advantage over 
competitors during the whole period of seventeen 
years. Long before the expiration of that time some 
device of a different sort may enable a rival to create 
the same product with more than equal economy, and 
the leadership in production then passes to this rival, 
to remain with him till a still further device effects a 
still larger economy and carries the leadership else- 
where. That alternation in leadership which we 
have described and illustrated takes place largely in 
consequence of our system of patents ; and yet every 
particular patent affords a quasi-monopoly to its 
holder. The endless succession of them insures a wide 
diffusion of advantages. At the expiration of each 
patent, even if it has not been siipplanted by a later 
and more valuable one, the public gets the benefit 
of the full economy it insures, and wherever an unex- 
pired patent is supplanted by a new one, the public 
gets this benefit much earlier. Cost of production 
tends rapidly downward, and the public is the per- 
manent benefibiary. 

Patents as a Means of Curtailing Monopolies. — 
While a patent may sometimes sustain a powerful 
monopoly it may also afford the best means of break- 
ing one up. Often have small producers, by the use 
of patented machinery, trenched steadily on the busi- 
ness of great combinations, till they themselves be- 



368 ESSENTIALS OF ECONOMIC THEORY 

came great producers, secure in the possession of a 
large field and abundant profit. Moreover, in the 
case of a patent which builds up a monopoly and 
continues for the full seventeen years of its duration 
unsupplanted by any rival device, the public is likely 
to get more benefit than the patentee, or even the 
company which uses his invention. In widening the 
market for its product the company must constantly 
cater to new circles of marginal consumers, and must 
give to all but the marginal ones an increasing benefit 
that is in excess of what it costs them. Probably 
few patents have been issued in America which illus- 
trate the unfavorable features of the system more 
completely than did the Bell telephone patent, 
which gave to a single company during a long period 
a monopoly of the telephone business; and yet there 
are few men of affairs who do not perceive that, in 
the saving of time which the telephone effected and in 
the acceleration of business which it caused, they 
gained from the outset more than they lost in the 
shape of high fees. Something of the same kind is 
true of the users of domestic telephones ; for though 
they may cost more than they should, they do their 
share toward placing those who use them on a higher 
level of comfort. 

The Law of Survival of Efficient Organization. — In 
broad outlines we have depicted the conditions which 
favor technical progress. There is a law of sur- 
vival which, when competition rules, eliminates poor 
methods and introduces better ones in endless suc- 
cession. Under a regime of secure monopoly this 
law of survival scarcely operates, though desire for 
gain causes a progress which is less rapid and sure. 
The same may be said of changes in organization, in 



LAW OF TECHNICAL PROGRESS 369 

SO far as that means a coordinating of the labor and the 
capital within an establishment. When the manager 
of a mill so marshals his forces as to get a much larger 
product per man and per dollar of invested capital than 
a rival can do, he has that rival at his mercy and can 
absorb his business and drive him from the field. In 
order to survive, any producer must keep pace with 
the aggressive and growing ones among his rivals in 
the march of improvement, whether it comes by im- 
proved tools of trade or improved generalship in the 
handling of men and tools. Quite as remorseless 
as the law of survival of good technical methods is 
the law of survival of efficient organization, and so 
long as the organization is limited to the forces under 
the control of single and competing entrepreneurs, 
what we have said about the advance in methods 
applies to it. It is a beneficent process for society, 
though its future scope is more restricted than is that 
of technical improvement, since the marshaling of 
forces in an establishment may be carried so near to 
perfection that there is a limit on further gains. 
Moreover organization, in the end, ceases to confine 
itself to the working forces of single entrepreneurs, 
but often continues till it brings rival producers into 
a union. 

The Extension of Organization to Entire Sub- 
groups. — Both of these modes of progress cause 
establishments to grow larger, and the ultimate effect 
of this is to give over the market for goods of any one 
kind to a few establishments which are enormously 
large and on something like a uniform plane of 
efficiency. Then the organizing tendency takes a 
baleful cast as the creator of ''trusts" and the extin- 
guisher of rivalries that have insured progress. 

2 b 



370 ESSENTIALS OF ECONOMIC THEORY 

When monster-like corporations once start a com- 
petitive strife with each other, it is very fierce and 
very costly for themselves; and this affords an in- 
ducement for taking that final step in organization 
which brings competition to an end. That is or- 
ganization of a different kind, and the effects of it are 
very unlike those of the coordinating process which 
goes on within the several establishments. In this, 
its final stage, the organizing tendency brings a whole 
subgroup into union, and undoes much of the good 
it accomplished in its earlier stage, when it was per- 
fecting the individual establishments within the sub- 
group. While the earlier process makes the supply 
of goods of a certain kind larger and cheaper, the final 
one makes it smaller and dearer; and while the earlier 
process scatters benefits among consumers, the final 
one imposes a tax on consumers in the shape of higher 
prices for merchandise. Yet the union that is 
formed between the shops is, in a way, the natural 
sequel to the preliminary organization which took 
place within them and helped to make them few and 
large. Trusts are a product of economic dynamics, 
and we shall study them in due time. The organiza- 
tion we have here in view is the earlier one which 
takes place within the several establishments. It 
obeys a law of survival in which competition is the 
impelling force, though it leads to a condition in 
which an effort is made to bring competition to an 
end. This earlier organization is most beneficent 
in its general and permanent effects; and what has 
been said of the results of progress in the technique 
of production may, with a change of terms, be said 
again of progress in the art of coordinating the agents 
employed. It is a source of temporary gain for 



tA.W OF TECHNICAL PROGRESS 371 

entrepreneurs and of permanent gains for laborers and 
capitalists. It adds to the grand total of the social 
product and leaves this to be distributed in accord- 
ance with the principle which, in the absence of un- 
toward influences, would treat the producers fairly — 
that which tends to give to each producer a share 
more or less equivalent to his contribution. In its 
nature and in its results it is the opposite of that other 
type of organization which seeks to bring competitive 
rivalry to an end, and in so far as it succeeds divorces 
men's contributions to the social product from the 
shares that they draw from it. 



CHAPTER XXII 

INFLUENCES WHICH PERVERT THE FORCES OF PROGRESS 

Thus far we have been dealing with what we 
have called natural forces. The phenomena which 
we have studied have not been caused by any con- 
scious and purposeful action of the people as a whole. 
They have not been brought about by the power 
of governments nor by anything which savors of 
what is called collectivism. Individuals have done 
what they would, seeking to promote their own in- 
terests under conditions of great freedom, and the 
effect has been a system of social industry which 
is highly productive, progressive, and generally 
honest. Production has constantly increased, and 
the product has been shared under the influence 
of a law which, if freedom were quite complete 
and competition perfect, would give to each producer 
what he contributes to the aggregate output of the 
great social workshop. We have claimed that, 
in the world as it is, influenced by a great number 
of disturbing forces, these fundamental laws still 
act and tend to bring about the condition of pro- 
ductiveness, progress, and honesty which is their 
natural result. If the actual condition falls short of 
this, the fact is mainly due to curtailments of free- 
dom and interferences with the competition which is 
the result of freedom. 

Influences which retard Static Adjustments. — 
Throughout the study we have paid due attention 

372 



EVIL EFFECTS OF MONOPOLY 373 

to those ordinary elements of "economic friction" 
which all theoretical writers have recognized and 
which practical writers have put quite in the fore- 
ground; and we have discovered that, while they 
are influences to be taken account of in any state- 
ment of principles, they in no wise invalidate prin- 
ciples themselves. For the most part they are 
influences which retard those movements which 
bring about static adjustments. An invention cheap- 
ens the production of some article and at once the 
natural or static standard of its price falls; but 
the actual price goes down more slowly, and in the 
interim the producer who has the efficient method 
gathers in the fruit of it as a profit. The retarding 
influence is a fact that should be as fully recognized 
in a statement of the law of profit as any other. The 
existence of it is an element in the theory of entre- 
preneur's profit. Improvements which reduce the 
cost of goods enhance the product of labor, and this 
sets a higher standard for wages than the one that 
has thus far ruled; but a delay occurs before the 
pay of workmen rises to the new standard. Ad- 
justments have to be made which require time, 
and these are as obviously elements that must be 
incorporated into an economic theory as any with 
which it has to deal. 

Influences which resist Dynamic Movements. — 
If there is anything which, without impairing the 
motive powers of economic progress, puts an ob- 
stacle in the way of the movement, it has to be treated 
like one of these elements of friction to which we 
have just referred. In our discussion of the growth 
of population, the increase of wealth, the improve- 
ment of method, etc., we have paid attention to 



374 ESSENTIALS OF ECONOMIC THEORY 

resisting forces as well as others, and have tried to 
determine what is the resultant of all of them. The 
forces of resistance have their place in a statement 
of dynamic laws. 

An Influence that perverts the Forces of Progress. 
— We have to deal, not only with such retarding 
influences, but with a positive perversion of the 
force that makes for progress. Everywhere we 
have perceived that competition — the healthful 
rivalry in serving the public — is essential in order 
that the best methods and the most effective or- 
ganization should be selected for survival, and 
that industry should show a perpetual increase in 
productive power. In our study of the question 
whether improved method and improved organiza- 
tion tend to promote or to check further improve- 
ment, we have found that these beneficent changes 
are naturally self-perpetuating, so long as the uni- 
versal spring of progress, competition, continues. 
A proviso has perforce been inserted into our op- 
timistic forecast as to the economic future of the 
world — if nothing suppresses competition, progress 
will continue forever. 

Monopoly and Economic Progress. — The very 
antithesis of competition is monopoly, and it is this 
which, according to the common view, has already 
seated itself in the places of greatest economic power. 
"Competition is excellent, but dead," said a so- 
cialist in a recent discussion; and the statement 
expresses what many believe. There is in many 
quarters an impression that monopoly will dominate 
the economic life of the twentieth century as com- 
petition has dominated that of the nineteenth. If 
the impression is true, farewell to the progress which 



EVIL EFFECTS OF MONOPOLY 375 

in the past century has been so rapid and inspiring. 
The dazzling visions of the future which technical 
gains have excited must be changed to an anticipa- 
tion as dismal as anything ever suggested by the 
Political Economy of the classical days — that of 
a power of repression checking the upward move- 
ment of humanity and in the end forcing it down- 
ward. No description could exaggerate the evil 
which is in store for a society given hopelessly over 
to a regime of private monopoly. Under this com- 
prehensive name we shall group the most important 
of the agencies which not merely resist, but posi- 
tively vitiate, the action of natural economic law. 
Monopoly checks progress in production and infuses 
into distribution an element of robbery. It per- 
verts the forces which tend to secure to individuals 
all that they produce. It makes prices and wages 
abnormal and distorts the form of the industrial 
mechanism. In the study of this perverting in- 
fluence we shall include an inquiry as to the means 
of removing it and restoring industry to its normal 
condition. We shall find that this can be done — 
that competition can be liberated, though the libera- 
tion can be accomplished only by difficult action on 
the part of the state. 

The comparatively Narrow Field of Present Action 
hy the State. — Economic theory has always recog- 
nized the existence and the restraining action of 
the civil law, which has prohibited many things 
which the selfishness of individuals would have 
prompted them to do. Certain officers of the state 
constitute, as we saw in an early chapter, one generic 
class of laborers, one of whose functions it is to 
retain in a state of appropriation things on which 



376 ESSENTIALS OF ECONOMIC THEORY 

other men have conferred utility — that is, to pro- 
tect property, and so to cooperate in the creation 
of wealth. In a few directions they render services 
which private employers might render in a less 
effective way. The state, through its special servants, 
educates children and youth, guards the public 
health, encourages inventions, stimulates certain 
kinds of production, collects statistics, carries letters 
and parcels, provides currency, improves rivers 
and harbors, preserves forests, constructs reservoirs 
for irrigation, and digs canals and tunnels for trans- 
portation. In these ways and in others it enters 
the field of positive production; but in the main 
it leaves that field to be occupied by private em- 
ployers of labor and capital. Business is still in- 
dividualistic, since those who initiate enterprises 
and control them are either natural persons or those 
artificial and legal persons, the corporations. 

The Growing Field of Action by Corporations. — 
Until recently there has been comparatively little 
production in the hands of corporations great enough 
to be exempt from the same economic laws which 
apply to a blacksmith, a carpenter, or a tailor. In- 
dividual enterprise and generally free competition 
have prevailed. The state has not checked them 
and the great aggregations of capital to which we 
give the name "trusts" have not, in this earlier 
period, been present in force enough to check them. 
The field for business enterprise has been open 
to individuals, partnerships, and corporations; they 
have entered it fearlessly, and a free-for-all com- 
petition has resulted. This free action is in process 
of being repressed by chartered bodies of capitalists, 
the great corporations, whom the law still treats 



EVIL EFFECTS OF MONOPOLY 377 

somewhat as though in its collective entirety each 
one were an individual. They are building up a 
semi-public power — a quasi-state within the general 
state — and besides vitiating the action of economic 
laws, are perverting governments. They trench 
on the freedom on which economic laws are postu- 
lated and on civic freedom also. 

How Corporations pervert the Action of Economic 
Laws. — Whatever interferes with individual enter- 
prise interferes with the action of the laws of value, 
wages, and interest, and distorts the very structure 
of society. Prices do not conform to the standards 
of cost, wages do not conform to the standard of 
final productivity of labor, and interest does not 
conform to the marginal product of capital. The 
system of industrial groups and subgroups is thrown 
out of balance by putting too much labor and capital 
at certain points and too little at others. Profits 
become, not altogether a temporary premium for 
improvement, — the reward for giving to humanity 
a dynamic impulse, — but partly the spoils of men 
whose influence is hostile to progress. Under a 
regime of trusts the outlook for the future of labor 
is clouded, since the rate of technical progress is not 
what it would be under the spontaneous action of 
many competitors. The gain in productive power 
which the strenuous race for perfection insures is 
retarded, and may conceivably be brought to a 
standstill, by the advent of corporations largely 
exempt from such competition. There is threatened 
a blight on the future of labor, since the standard 
of wages, set by the productivity of labor, does not 
rise as it should, and the actual rate of wages lags 
behind the standard by an unnaturally long inter- 



378 ESSENTIALS OF ECONOMIC THEORY 

val. There is too much difference between what 
labor produces and what it ought to produce, and 
there is an abnormally great difference between 
what it actually produces and what it gets. 

The Fields for Monopolies of Different Kinds. — 
Monopoly is thus a general perverter of the industrial 
system; but there are two kinds of monopoly, of 
which only one stands condemned upon its face as 
the enemy of humanity. For a state monopoly 
there is always something to be said. Even socialism 
— the ownership of all capital, and the management 
of all industry by governments — is making in 
these days a plea for itself that wins many adherents, 
and the demand that a few particular industries be 
socialized appeals to many more. The municipal 
ownership of lighting plants, street railways and 
the like, and the ownership of railroads, telegraph 
lines, and some mines by the state are insistently 
demanded and may possibly be secured. We can 
fairly assume that, within the period of time that 
falls within the purview of this work, general so- 
cialism will not be introduced. In a few limited 
fields the people may accept governmental monop- 
olies, but private monopolies are the thing we 
have chiefly to deal with; and it is to them, if they 
remain unchecked, that we shall have to attribute 
a disastrous change in that generally honest and 
progressive system of industry which has evolved 
under the spur of private enterprise. 

Two Modes of Approaching a Monopolistic Con- 
dition. — The approach to monopoly may be ex- 
tensive or intensive. A fairly complete monopoly 
may be established in some part of the industrial 
field, and the area of its operations may then be 



EVIL EFFECTS OF MONOPOLY 379 

extended. Smelters of iron and steel, after attain- 
ing an exclusive possession of their original fields 
of production, may become carriers, producers of 
ore, makers of wire, plate, and structural steel, and 
builders of ships, bridges, etc. 

On the other hand, a great corporation may have, 
at the outset, but little monopolistic power, and it 
may then acquire more and more of it within the 
original field of its operations. It may at first 
make competition difficult and crush a few of its 
rivals, and then, as its power increases, it may 
make competition nearly impossible in the greater 
part of its field and drive away nearly all the rivals 
who remain. It is necessary to form a more ac- 
curate idea than the one which is commonly prev- 
alent of what actual monopolies are, of what they 
really do, of what they would do if they were quite 
free to work their will, and of what they will do, on 
the other hand, if they are effectively controlled 
by the sovereign state. Regulation of monopolies 
we must have; that is not a debatable question. 
The sovereignty of the state will be preserved in 
industry and elsewhere, and it is perfectly safe to 
assert that only by new and untried modes of as- 
serting that sovereignty can industry hereafter be 
in any sense natural, rewarding labor as it should, 
insuring progress, and holding before the eyes of 
all classes the prospect of a bright and assured 
future. We are dependent on action by the state 
for results and prospects which we formerly secured 
without it; but though we are forced to ride rough- 
shod over laissez-faire theories, we do so in order 
to gain the end which those theories had in view, 
namely, a system actuated by the vivifying power 



380 ESSENTIALS OF ECONOMIC THEORY 

of competition, with all that that signifies of present 
and future good. 

The Nature of a True Monopoly. — The exclusive 
privilege of making and selling a product is a mo- 
nopoly in its completest form. This means, not only 
that there is only one establishment which is actually 
creating the product, but there is only one which 
is able to do so. This one can produce as much 
or as little as it pleases, and it can raise the price 
of what it sells without having in view any other 
consideration than its own interest. 

The Possibility of the Form of Monopoly without 
the Power of It. — A business, however, may have 
the form of a monopoly, but not its genuine power. 
It majT" consolidate into one great corporation all 
the producers of an article who send their goods 
into a general market, and if no rivals of this cor- 
poration then appear, the public is forced to buy 
from it whatever it needs of the particular kind 
of goods which it makes. Consumers of A'" of our 
table may find that they can get none of it except 
from a single company. Yet the price may con- 
ceivably be a normal one. It may stand not much 
above the cost of production to the monopoly itself. 
If it does so, it is because a higher price would invite 
competition. The great company prefers to sell 
all the goods that are required at a moderate price 
rather than to invite rivals into its territory. This 
is a monopoly in form but not in fact, for it is shorn 
of its injurious power; and the thing that holds 
it firmly in check is potential competition. The 
fact that a rival can appear and loill appear if the 
price goes above the reasonable level at which it 
stands, induces the corporation to produce goods 



EVIL EFFECTS OF MONOPOLY 381 

enough to keep the price at that level. Under such 
a nearly ideal condition the public would get the 
full benefit of the economy which very large pro- 
duction giveS;. notwithstanding that no actual com- 
petition would go on. Prices would still hover 
near the low level of cost. The most economical 
state conceivable is one in which, in many lines of 
business, a single great corporation should produce 
all the goods and sell them at a price so slightly 
above their cost as to afford no incentive to any 
other producer to come into the field. Since the 
first trusts were formed the efficiency of potential 
competition has been so constantly displayed that 
there is no danger that this regulator of prices will 
ever be disregarded. Trusts have learned by ex- 
perience that too great an increase in the prices of 
their products ''builds mills." It causes new pro- 
ducers who were only potentially in the field actually 
to come into it and to begin to make goods. To 
forestall this, the trusts have learned to pursue 
a more, conservative policy and to content them- 
selves with smaller additions to the prices of their 
wares. If it were not for this regulative work of 
the potential competitor, we should have a regime 
of monopoly with its unendurable evils; and if, 
on the other hand, the regulator were as efficient 
as it should be, we should have a natural system 
in which complete freedom would rule. The limit- 
less difference between these conditions measures 
the importance of potential competition.^ 

^ For an early statement of this principle the reader is 
referred to the chapter on "The Persistence of Competition," 
by Professor F. H. Giddings, in a work entitled "The Modern 
Distributive Process," written jointly by Professor Giddings 



382 ESSENTIALS OF ECONOMIC THEORY 

Cost of Production in Independent Mills a Standard 
of Price. — A consolidated company will ultimately 
have a real but small advantage over a rival in the 
cost of producing and selling its goods; but at 
present the advantage is often with the rival. His 
plant is often superior to many of those operated 
by the trust. When the combination brings its 
mills to a maximum of efficiency and then reaps 
the further advantage which consolidation itself in- 
sures, it will be able to make a small profit while 
selling goods at what they cost in the mills of its 
rival. This cost which a potential competitor will 
incur if he actually comes into the field sets the 
natural standard of price in the new regime of seem- 
ing monopoly ; and it will be seen that if this natural 
price really ruled, the monopoly would have only 
a formal existence. It would be shorn of its power 
to tax the public. 

Partial Monopolies now Common. — What we 
have is neither the complete monopoly nor the 
merely formal one, but one that has power enough 
to work injury and to be a menace to industry and 
politics. If it long perverts industry, it will be 
because it perverts politics — because it baffles the 
people in their effort to make and enforce laws 
which would keep the power of competition alive. 
In terms of our table the subgroups are coming 
to resemble single overgrown corporations. Each 
of them, where this movement is in progress, is tend- 
ing toward a state where it will have a single entre- 
preneur — one of those overgrown corporations which 
resemble monopolies and are commonly termed so. 

and the present writer. This chapter first appeared as an 
article in the Political Science Quarterly for 1887. 



EVIL EFFECTS OP MONOPOLY 383 

Complete monopolies, as we have said, they are not; 
and yet, on the other hand, they are by no means 
without monopolistic power. They are held some- 
what in check by the potential competition we have 
referred to, but the check works imperfectly. At 
some points it restrains the corporations quite 
closely and gives an approach to the ideal results, 
in which the consolidation is very productive but 
not at all oppressive; while elsewhere the check 
has very little power, oppression prevails, and if 
anything holds the exactions of the corporation 
within bounds, it is a respect for the ultimate power 
of the government and an inkling of what the people 
may do if they are provoked to drastic action. 

Two Policies open to the State. — The alternatives 
which are open to us are, in this view, reduced to 
two. Consolidation itself is inevitable. If, in any 
great department of production, it creates a true 
monopoly which cannot be otherwise controlled, the 
demand that the business be taken over by the 
government and worked for the benefit of the public 
will become irresistible. If it does not become a 
true monopoly, the business may remain in private 
hands. Inevitable consolidation with a choice be- 
tween governmental production and private pro- 
duction is offered to us. We are at liberty to select 
the latter only if potential competition shall be 
made to be a satisfactory regulator of the action 
of the great corporations. 

The Future Dependent on Keeping the Field open 
for Competitors. — Potential competition, on which, 
as it would seem, most of what is good in the pres- 
ent economic system depends, has also the fate 
of the future in its hands. Existing evils will de- 



384 ESSENTIALS OF ECONOMIC THEORY 

crease or increase according as this regulator shall 
work well or ill. Yet it is equally true that the 
government has the future in its hands, for the 
potential competition will be weak if the government 
shall do nothing to strengthen it. It is, indeed, 
working now, and has been working during the 
score of years in which great trusts have grown up; 
but the effects of its work have been unequal in 
different cases, and it is safe to say that, in the field 
as a whole, its efficiency has, of late, somewhat 
declined. With a further decline, if it shall come, 
prices will further rise, wages will fall, and progress 
will be retarded. The natural character of the 
dynamic movement is at stake and the continuance 
of so much of it as now survives and the restoration 
of what has been lost depend on state action. 

The Impossibility of a Laissez-faire Policy. — 
Great indeed is the contrast between the present 
condition and one in which the government had 
little to do but to let industry alone. Letting free 
competitors alone was once desirable, but leaving 
monopolies quite to themselves is not to be thought 
of. It would, indeed, lead straight to socialism, 
under which the government would lay hands on 
business in so radical a way as to remove the private 
entrepreneurs altogether. If we should try to do 
nothing and persist too long in the attempt, we 
might find ourselves, in the end, forced to do every- 
thing. What is of the utmost importance is the 
kind of new work the government is called on to do. 
It is chiefly the work of a sovereign and not that 
of a producer. It is the work of a law-giving power, 
which declares what may and what may not be 
done in the field of business enterprise. It is also 



EVIL EFFECTS OF MONOPOLY 385 

the work of a law-enforcing power, which makes 
sure that its decrees are something more than pious 
wishes or assertions of what is abstractly right. 
All of this is in harmony with the old conception 
of the state as the protector of property and the 
preserver of freedom. The people's interests, which 
the monopoly threatens, have to be guarded. The 
right of every private competitor of a trust to enter 
a field of business and to call on the law for pro- 
tection whenever he is in danger of being unfairly 
clubbed out of it, is what the state has to preserve. 
It is only protecting property in more subtle and 
difficult ways than those in which the state has 
always protected it. The official who restrains the 
plundering monopoly, preserves honest wealth, and 
keeps open the field for independent enterprise 
does on a grand scale something that is akin to the 
work of the watchman who patrols the street to 
preserve order and arrest burglars. 

A Possible Field for Production hy the State. — 
There is a possibility that in a few lines of production 
the American government may so far follow the 
route marked out by European states as to own 
plants and even operate them, and may do so in 
the interest of general competition. It may con- 
struct a few canals, with the special view to con- 
trolling charges made by railroads. It may own 
coal mines and either operate them or control the 
mode of operating them, for the purpose of curbing 
the exactions of monopolistic owners and securing 
a continuous supply of fuel. It may even own 
some railroads for the sake of making its control of 
freight charges more complete. Such actions as 
these may be slightly anomalous, since they break 

2c 



386 ESSENTIALS OF ECONOMIC THEORY 

away from the policy of always regulating and 
never owning; nevertheless, they are a part of a 
general policy of regulation and a means of escape 
from a policy of ownership. The selling of coal by 
the state may help to keep independent manufactur- 
ing alive, and carrying by the state may do so in a 
more marked way. If so, these measures have 
a generally anti-socialistic effect, since they obstruct 
that growth of private monopoly which is the leading 
cause of the growth of socialism. 

Evils within the Modern Corporation. — The great 
corporation brings with it some internal evils which 
might exist even if it never obtained a monopoly of 
its field. In this class are the injuries done by 
officers of the corporation to the owners of it, the 
stockholders. A typical plundering director has even 
more to answer for by reason of what he does to 
his own shareholders than because of what he and 
the corporation may succeed in doing to the public. 
In the actual amount of evil done, the robbing of 
shareholders is less important than the taxing of 
consumers and the depressing of wages, which occur 
when the effort to establish a monopoly is success- 
ful; but in the amount of iniquity and essential 
meanness which it implies on the part of those who 
practice it, it takes the first rank, and its effect in 
perverting the economic system cannot be over- 
looked. The director who buys property to unload 
upon his own corporation at a great advance on 
its cost, or who alternately depresses the business 
of his corporation and then restores it, in order that 
he may profit by the fall and the rise of the stock, 
not only does that which ought to confine his future 
labors to such as he could perform in a penitentiary, 



EVIL EFFECTS OF MONOPOLY 387 

but does much to vitiate the action of the economic 
law which, if it worked in perfection, would give 
to the private capitalist a return conformable to 
the marginal product of the capital he owns. A 
sound industry requires that the state should protect 
property where this duty is now grossly neglected. 

If more publicity will help to do this, — if light- 
ing street lamps on a moral slum will end some of 
the more despicable acts committed by men who 
hold other men's property in trust, — sound economics 
will depend in part on this measure, but it depends in 
part on more positive ones. 

The investment of capital is discouraged and 
an important part of the dynamic movement is 
hindered wherever shareholders are made insecure; 
and therefore the entire relation of directors to 
those whose property they hold in trust needs to 
be supervised with far more strictness than has 
ever been attempted under American law. When 
invested capital shall be quite out of the range of 
buccaneers' actions, it will produce more, increase 
more rapidly, and the better do its part toward 
maintaining the wages of labor. 

Perversions of the Economic System by the Action 
of Promoters. — The state will be carrying out its 
established policy if it shall effectively control the 
action of promoters in their relation to prospective 
investors. The man who is invited to become a 
stockholder has a right to know the facts on which 
the value of the property offered to him depends. 
How many plants does the consolidated corporation 
own? How much did they cost? What is their 
present state of efficiency? What have been their 
earnings during recent years? Concerning these 



388 ESSENTIALS OF ECONOMIC THEORY 

things and others which go to make up a correct 
estimate of the value of what the promoter is selling, 
the purchaser needs full and trustworthy informa- 
tion, and an obvious function of the law is to see 
that he gets it. That such action would guard 
investors' personal rights is, of course, a reason for 
taking it; but the reason that here appeals to us 
is the fact that it would remove a second perversion 
of the economic system, accelerate the increase of 
capital, and help in securing a distribution of wealth 
which would be more nearly in accordance with 
natural law. 

Perversions of the System caused hy the Action of 
Corporations in their Entirety. — More directly within 
the domain of pure economics is the relation between 
the typical great corporation and the majority of 
the public which is wholly outside of it. In the 
common mind this relation also often appears as 
that of plunderers and plundered, and what it often 
has actually been, is a relation between corporations 
which have exacted a certain tribute and a body 
of consumers which has had to pay the tribute. 
Bound up with this general relation between the 
manufacturing corporation and the consuming public 
is one between it and producers of raw material 
which it buys and with laborers whom it hires. In 
this last relation what is endangered is the normal 
rate of pay, present and future. The type of measure 
which protects consumers protects the other parties 
who are affected by the great corporation's policy. 
Workers are safe and producers of raw materials 
are measurably so if the power of competition in 
the making and selling of the goods is kept alive. 
If we prevent the trust from taking tribute from 



EVIL EFFECTS OF MONOPOLY 389 

the purchasing public, we shall by the same means 
prevent it from oppressing laborers and farmers. 

Why the Business of a Monopoly should never be 
regarded as a Private Interest. — The people are 
already putting behind them and ought to put 
completely out of sight and mind the idea that the 
business of a monopoly is a private enterprise which 
its officers have a right to manage as they please, 
A corporation becomes a public functionary from 
the time when it puts so many of its rivals out of 
the field that the people are dependent on it. As 
well might the waiter who brings food to the table 
claim that the act is purely his own affair and that 
the customers and the manager have no right of 
interference, however well or ill the customers may 
be served, as a combination of packers might claim 
that any important detail of their business concerns 
them only. The illustration is a weak one; for in 
the case of a trust which controls a product that is 
needed by the public, it is the full majesty of the 
people as a whole which is in danger of being set at 
naught. Such a company is a public servant in 
all essential particulars, and although it is allowed 
to retain a certain autonomy in the exercise of its 
function, that autonomy does not go to the length 
of liberty to wrong the public or any part of it. 
The preservation of a sound industrial system re- 
quires that governments shall forestall injuries 
which the interests of the monopolistic corporation 
impels it to inflict. No discontinuance of essential 
services, no stinting of them, and no demand for 
extortionate returns for them can be tolerated 
without a perversion of the economic system. The 
natural laws we have presented will work imper- 



390 ESSENTIALS OF ECONOMIC THEORY 

fectly if, for example, the danger of a coal famine 
shall forever impend over the public or if this fuel 
shall be held at an extortionate price. Workmen, 
indeed, have a larger stake than have others in the 
maintenance of a fair field for competing producers 
and an open market for labor, but other classes feel 
the vitiating of the industrial system which occurs 
when the fair field and the open market are absent. 

Why the Motive which once favored Non-inter- 
ference in Industry by the State now favors Inter- 
ference. — We have said that what is needed is 
vigorous action by the state in keeping alive the 
force on which the adherents of a laissez-faire policy 
rested their hope of justice and prosperity. These 
fruits of a natural development have always de- 
pended on competition, and they still depend on it, 
though its power will have to be exerted in a new 
way. This requires a special action by the state; 
but in taking such action the government is con- 
forming its policy to the essential part of the laissez- 
faire doctrine. It lays hands on industry to-day 
for the very reason which yesterday compelled it 
to keep them off — the necessity of preserving a 
beneficent rivalry in the domain of production. 

America the Birthplace of Consolidated Corpora- 
tions. — Consolidations of the kind that require 
vigorous treatment by the state have their special 
home in America. They have taken on a number 
of forms, but are coming more and more into the 
most efficient form they have ever assumed, that of 
the corporation. The holding company is the 
successor of the former trust. The method of 
union by which stockholders in several corporations 
surrendered their certificates of stock to a body of 



EVIL EFFECTS OF MONOPOLY 391 

trustees and received in return for them what were 
called trust certificates, has been abandoned, and 
the readiness with which this has been done has 
been due to the fact that there are better modes of 
accomplishing the purpose in view. A new cor- 
poration can be formed, and, thanks to those small 
states which thrive by issuing letters of marque, 
it can be endowed with very extensive powers. It 
can, of course, buy or lease mills, furnaces, etc., 
but what it can most easily do is to own a controlling 
portion of the common stock of the companies which 
own the plants. The holding company has a sinister 
perfection in its mode of giving to a minority of 
capital the control over a majority. It is possible 
that the actual capital of the original corporation 
may be mainly a borrowed fund and may be rep- 
resented by an issue of bonds, while the stock- 
holders may have contributed little to the cost of 
their plants and their working capital; and yet 
this common stock may confer on its owners the 
control of the entire business. The corporation 
that buys a bare majority of this common stock 
may have an absolute power over the producing 
plants and their operations. If the holding com- 
pany should secure much of its own capital by an 
issue of bonds, the amount which its own stock- 
holders would have to contribute would be only 
a minute fraction of the capital placed in their 
hands, and yet it might insure to them the control 
of a domain that is nothing less than an industrial 
empire, if indeed they are not themselves obliged 
to surrender the government of it to an innermost 
circle composed of directors. 
Earlier Forms of Union. — There are forms of 



392 ESSENTIALS OF ECONOMIC THEORY 

union which are less complete than this and have 
been widely adopted. There was the original com- 
pact among rival producers to maintain fixed prices 
for their goods. It was a promise which e very- 
party in the transaction was bound in honor to keep, 
but impelled by interest to break ; and it was morally 
certain to be broken. There was this same con- 
tract to maintain prices strengthened by a cor- 
responding contract to hold the output of every 
plant within definite limits. If this second promise 
were kept, the first would be so, since the motive 
for cutting the price agreed upon was always the 
securing of large sales, and this was impossible 
without a correspondingly large production; but 
security was needed for the fulfillment of the second 
promise. This security was in due time afforded, 
and there was perfected a form of union which was 
a favorite one, since it did not merge and extinguish 
the original corporations, but allowed them to 
conduct their business as before, though with a re- 
stricted output and with prices dictated by the 
combinations. As a rule each of the companies 
paid a fine into the treasury of the pool if it produced 
more than the amount allotted to it, and received 
a bonus or subsidy if it produced less. This form 
has more of kinship with the Kartel of Germany than 
the other American forms, and it might have con- 
tinued to prevail in our country if the law had treated 
it with toleration. It leaves the power of com- 
petition less impaired than does the consolidated 
corporation, of which the laws are more tolerant. 
By repressing those unions which can be easily 
defined and treated as monopolies we have called 
into being others which are far more monopolistic 



EVIL EFFECTS OF MONOPOLY 393 

and dangerous. The economic principles on which 
the regulation of all such consolidations rests apply- 
especially to the closer unions which take the cor- 
porate shape. To the extent that other forms of 
union have any monopolistic power the same prin- 
ciples apply also to them; but we shall see why it 
is that the pools which the law forbids have little 
of this power and the corporations have much of it. 

The Condition which precludes True Monopoly. — 
A monopoly grows up when a company keeps such 
perfect guard over its economic field that new rivals 
cannot enter without exposing themselves to peril. 
As we have seen, it is not always necessary that 
the rival company should be formed. It is enough 
that it should be able to be formed and to enter 
the field with safety. In that case it will actually 
appear if an inducement is offered. Such an in- 
ducement is always afforded when the trust puts 
an unnaturally high price on its product — a price 
above that standard set by the cost of production 
which would rule in a normal market. 

Specific Means of Repressing Competition. — In 
practice a condition is created in which the new 
competitors are reluctant to appear; for the con- 
solidated company has dangerous weapons with 
which it can assail them. It can often secure spe- 
cially low rates for the transportation of its products, 
and this is sometimes enough to make the com- 
petitor's prospect hopeless. Further, the "trust" — 
with or without the aid offered by the special and 
low freight charges — can enter the particular 
corner of the field where a small rival is operating, 
sell goods for less than they cost, and drive off the 
rival, while maintaining itself by the high prices 



394 ESSENTIALS OF ECONOMIC THEORY 

it exacts everywhere else. Again, it may reduce 
the price of one variety of goods, which a particular 
competitor is making, and crush him, while it makes 
a profit on all other varieties of goods. Still again, 
it may resort to the ''factor's agreement," by refus- 
ing to sell at the usual wholesalers' rate any of its 
own products to a merchant who handles products 
of its rivals. If some of its goods are of a kind 
that the merchant must have, this measure brings 
him to terms, causes him to refuse to handle inde- 
pendent products, and makes it difficult for the 
rival producer to reach the public with his tender of 
goods. The trust can organize special corporations 
for making war on competitors while itself evading 
responsibility. A bogus company which, in an 
aggravated case, is a rogue's alias for a parent cor- 
poration, may be formed for the purpose of more 
safely doing various kinds of predatory work. 

The Economic Necessity of Doing what is legally 
Difficult. — From the point of view of an economic 
theorist it is enough to show that the practices 
which cut off the potential competitor from a safe 
entrance into the field of production so pervert 
the economic system as to hold in abeyance its 
most fundamental force, that of competition. They 
vitiate the action of every law which depends on 
competition. Value, wages, interest, profits, and 
the very structure of society feel the perverting 
effect of this repression of the force that under 
normal conditions serves to adjust them. From 
a practical point of view it is enough to show that 
the existence of such practices — if the monopolies 
that grow out of them shall continue and increase 
— present to the people the alternative of accept- 



EVIL EFFECTS OF MONOPOLY 395 

ing an economic state which is unendurable, or 
accomphshing, in a legal way, what many already 
pronounce impossible. For the purpose of this 
treatise it suffices to point to the fact that few at- 
tempts worth mentioning have been made to sup- 
press any of these practices except the first — that 
of favoritism in connection with freight charges — 
and that in the case of this practice only a begin- 
ning of serious effort has been made. While there 
is some excuse for abandoning a purpose when long 
and determined effort to execute it has failed, there 
is no possible excuse for concluding, in advance of 
such effort, that a systematic policy which gives 
a promise of saving us from an intolerable outcome 
is impracticable. All the props of monopoly should 
be taken away and not one merely, and before this 
shall be tried radical measures will not be in order. 
Sociahsm will not be fairly before the people's par- 
liament till it shall come as the only escape from 
a condition of private monopoly. What economic 
law clearly shows is that monopoly will not come 
if the practices on which it depends shall be sup- 
pressed, and the people may be trusted to deter- 
mine whether the suppression is or is not possible. 
That they may decide this question the issue that 
depends on it must be brought before them; and 
all that falls within the sphere of the economist is 
the stating of the effects of monopoly, the causes 
of its existence, and the public action that if taken 
will remove these causes. The preservation of a 
normal system of industry and a normal division 
of its products requires the suppression of all those 
practices of great corporations on which their mo- 
nopolistic power depends. 



CHAPTER XXIII 

GENERAL ECONOMIC LAWS AFFECTING 
TRANSPORTATION 

Of all the various clubs used by trusts for attack- 
ing rivals and driving them from the field, the first 
in order is the one which depends on getting special 
rates for transportation. Railroads develop mo- 
nopolies within their own sphere and also contribute 
greatly to the development of monopolies elsewhere. 
The second fact is the more important, but both 
require attention. By reason of its special con- 
nection with producers' monopolies does the function 
of the common carrier have much to do in deciding 
the question whether an economic revolution is or 
is not impending. It is safe to say that it is im- 
minent as a possibility and will become probable 
if the favoritism shown by carriers to great shippers 
is not effectually repressed. 

How the Consolidation of Railroads makes the 
Repression of Favoritism Easy. — It is also safe to 
say that such repression will be easy if the con- 
solidation of railroads themselves shall actually 
go to the utmost possible length. With all lines 
under one central control and earnings entirely 
pooled, there would be no motive for granting special 
favors to any shipper except as it might come through 
a corrupt relation between the shipper and some 
officials of the railroads. To the carrying corpora- 
tion the giving of a rebate would merely mean a 

396 



PRINCIPLES OF TRANSPORTATION 397 

surrendering of some possible profits. With rail- 
roads consolidated the threat of the great shipper 
to divert his freight from one line to another would 
lose all its effectiveness, and the interests of the 
stockholders in the general carrying company would 
demand high rates from all. The law forbidding 
rebates and all other forms of favoritism would 
assist the railroad company in carrying out its own 
policy, and would be obeyed with the readiness 
with which an order to pocket an increased gain is 
naturally complied with. 

A Danger which becomes greater as Discrimina- 
tions become Fewer. — This reveals the fact that 
the consolidation which makes the suppressing of 
discriminations easy will make an all-round advance 
of rates possible, in so far as merely economic in- 
fluences are concerned. Nothing but the power 
of the state itself can prevent this; and while the 
consolidation that would be perfect enough to stop 
discriminations has not yet taken place, enough of 
consolidation has been secured to cause some advance 
in the general scale of freight charges and to threaten 
much more. It already rests with the government 
to avert this second evil. Monopohes extending 
throughout the field of production would mean a 
demand for socialism which could hardly be resisted; 
and even a few monopolies in industry assisted by 
a great one in transportation would mean much the 
same thing. 

General Economic Principles governing Trans- 
portation. — With a view to determining the bear- 
ing which transportation has on the problem of 
economic freedom, and thus on the prospect of 
avoiding the alternative of state socialism, we need 



398 ESSENTIALS OF ECONOMIC THEORY 

to state the essential principles in the theory of 
railway transportation. 

The fact that makes a vast amount of carrying 
necessary is that agriculture is subject to a law of 
diminishing returns, while manufacture obeys an 
opposite law. In tilling the soil labor and capital 
yield less and less as more and more of them are 
used in a given area; and therefore both of these 
agents need to extend themselves widely over the 
land in order to use it economically. In the produc- 
tion of staple crops which can be freely carried 
across sea and continent, the natural tendency is 
to scatter a rural population with some approach 
to evenness over all the land available for such 
crops. Market gardening requires less land per 
man and the areas devoted to it are much more 
densely peopled; but even within this department 
of agriculture the law holds true that too much 
labor and capital must not be bestowed upon an 
acre of ground. In a general way agriculture diffuses 
population, while manufacturing concentrates it. 
This latter work is done most economically in great 
establishments. 

The Law of Diminishing Returns from Land not 
restricted to tlmt used in Agriculture. — It is com- 
monly said that manufacturing is unlike agriculture 
in that it is subject to a law of increasing returns; 
but this statement is true only when its terms are 
carefully interpreted. The diminishing returns from 
agriculture and the increasing returns from manufac- 
turing are not two opposite effects from the same 
cause. There is, indeed, a logical anomaly in con- 
trasting them with each other. In agriculture we get 
smaller and smaller results per unit of labor and capi- 



PRINCIPLES OF TRANSPORTATION 399 

tal when we overwork a piece of ground of a given size 
by putting more and more labor and capital on it. 
The trouble here is that land, on the one hand, and 
labor and capital, on the other, are not combined 
in advantageous proportions; and exactly the 
same effect is produced by the same cause in manu- 
facturing. One can overtax a mill site by con- 
fining larger and larger amounts of capital within 
a given area. If the site is so small that the build- 
ing has to be carried far into the air and supplied 
with walls strong enough to resist the jar of machinery 
on many floors, manufacturing becomes a far less 
economical operation than it would be if the site were 
larger and the mill lower. The gain from centraliz- 
ing the manufacturing process comes in part from 
the increased size of the particular establishments; 
but that requires that every part of the plants, 
land included, should be increased. As the whole 
of an establishment becomes larger its product 
becomes cheaper; but, in the enlargement, there 
should, be no undue stinting in the amount of land 
used. In both agriculture and manufacturing, then, 
there is a loss of productive power when areas of 
land are disproportionately small, as compared 
with amounts of labor and artificial capital; but 
in the realm of manufacturing large establishments 
under single entrepreneurs combining the agents of 
production in the right proportion increase the pro- 
ductive power of men and instruments as they do 
not in agriculture. Great farms show no such 
economy as great mills. 

Basis of the Law of Increasing Returns in Manu- 
facturing. — There would be some increase of returns 
in manufacturing from making the establishments 



400 ESSENTIALS OF ECONOMIC THEORY 

large even if the work were done by hand; but by far 
the greater part of the advantage is due to machinery. 
The invention of the steam engine was the beginning 
of it, and that of textile machinery afforded a quick 
continuation of the revolutionary change. In nearly 
all lines of production, outside of agriculture, ma- 
chinery is far too elaborate to be used in household 
industry. One may say that the transformation of 
the world into one enormous farm dotted over with 
great workshops, with all the social and political 
changes which that involves, was brewing in the tea- 
kettle which the boy Watt is said to have watched, 
as the lid was raised by puffs of steam and the pos- 
sibility of a steam engine suggested itself. The 
mechanical force of steam began at once to centralize 
manufacturing. That made increased transporting 
necessary, and it was not long before the same ele- 
ment, steam, provided the means of this extensive 
transportation. It is necessary, of course, to carry 
the products of the farm to the mill, and also to carry 
manufactured goods back to the farm; and neither 
of these things would have been required on any large 
scale under a system of household industry. The 
economy which leads to this lies altogether in the 
greater cheapness of the manufacturing. The dif- 
ference between the cost of fashioning materials in 
the home and that of doing it in the mill is so large 
that it would have brought about the building of 
mills and the creation of manufacturing centers, with 
the carrying which it involves, if neither railroads 
nor steamboats had come into being. The growth 
of factory villages had made some headway at a time 
when no elaborate machinery existed; but if that 
condition had continued, manufacturing centers 



PRINCIPLES OF TRANSPORTATION 401 

would have been smaller, more numerous, and more 
scattered than they have been. It is the cheapness 
of carrying by railroads and steamships which has 
made it possible to get the fullest benefit from the 
so-called law of increasing returns in manufacturing. 

Mining as related to Transportation. — Mining is 
a process which has to be local, because ores and coal 
are furnished by nature in a local way; and one 
might mention this as a second cause of extensive 
transportation. A great part of the carrying so oc- 
casioned depends, indeed, on the growth of the manu- 
facturing centers, since mills and furnaces need great 
quantities of fuel. A means of heating private dwel- 
lings, of cooking food, etc., might conceivably be 
supplied in a local way, by the growth of forests ; but 
the fuel needed for the centers of manufacturing and 
commerce has to come from distant points. The 
law of increasing returns in manufacturing, then, and 
natural location of mines are the most generic causes 
of transportation. The system which has resulted 
gives to everybody more and better food, as well as 
more and better goods of every kind, than he could 
possibly have had if the primitive system of local 
manufacturing had continued. The cheapness with 
which form utility is created in the mill and place 
utility on the railroad are the two causes which are at 
work. 

The Rivalry between Producers of Form Utility and 
Producers of Form and Place Utilities. — In the tech- 
nical language of economics, there has been a contest 
in efficiency between that creating of form utility 
which is done when goods are made in households or 
in small villages, and that joint process of creating 
form and place utility which consists in making goods 

2d 



402 ESSENTIALS OF ECONOMIC THEORY 

at central points and carrying them to the widely 
scattered homes of consumers. The latter process, 
involving as it does the necessity of creating two 
utilities instead of one, is now by far the cheaper. 

The Ultimate Limit of Charges for Transportation. — 
Charges for transportation have as one extreme limit 
the difference between the cost of making goods at 
one point and the cost of making them at another. 
This rule is applicable, of course, only to those 
numerous cases in which it is physically possible to 
create the goods at both points. If they can be made 
at point A for ten dollars, by using five days' labor, 
and at point B for twenty dollars, by using ten days' 
labor, ten dollars would furnish the extreme limit of 
a possible charge for carrying them from A to B. In 
a certain number of cases the actual charge approxi- 
mates this extreme limit. With a mill in A, work- 
ing with much economy, and a number of household 
workshops in B producing with less economy, the prod- 
uct of the large mill may invade the territory sup- 
plied by the little workshops, and the carrier may 
receive in return for transportation about as much as 
the difference between the two costs of production. 
With a great mill at A and a small one at B, the same 
thing may happen. 

Narrower Limits usually Applicable. — In by far 
the larger number of cases such a difference between 
costs is more than the carrier can get. Usually 
there is some alternative mode of procuring goods at 
B which does not involve actually making them on 
the spot at a serious disad^^antage. It may be 
possible to convey them to B from a third locality, C, 
where they are made in an advantageous way. If 
this carrying is done by some process in which com- 



YuJ : 



PRINCIPLES OF TRANSPORTATION 403 

petition rules, — if, for instance, C is not far from B, 
so that goods can be carried thither by drays, — the cost 
of making the goods in C plus the natural or competi- 
tive cost of conveying them to B will together make 
up the natural cost q 

of procuring them in 
this latter locality. 
The difference be- ^^^ 

tween that and the ^ 

cost of making them in the great center which \ve 
have called A will constitute the limit of the freight 
charge from that city to B ; and even though between 
these two points the carrier has a monopoly of the 
traffic, he can get no more/ 

Other Applications of the Same Rule. — This rule 
applies even where goods made in C have to 
be carried great distances, provided the carrying 
is done in some competitive way, at a low rate 
based on cost. Consumers in B may have the 
option of bringing the goods by water, along the 
coast or, across an ocean, at a rate that makes 
the cost of procuring them at B not much above 
the cost of making them at A. If so, this small 
difference of costs represents all that any carrier 
can get for moving them from A to B, and though 
this carrying may be done by a railroad which has 
a monopoly of its route, its service will command 
no higher rate than the one which is thus naturally 
set for it. The rate is governed by costs, though not 
by costs incurred by the railroad. Whenever com- 
petition rules, the returns for any productive function 

^ For a case in which a railroad can get the entire difference 

■ between the cost of goods at the point from which it carries 

them and their cost at the place of delivery, but voluntarily 

refrains from doing so, see the note at the end of this chapter. 



404 ESSENTIALS OF ECONOMIC THEORY 

tend to conform to costs, and we here suppose that it 
does so rule (1) in the making of goods at A, and (2) in 
the procuring of the goods by some alternative method 
at B. The difference between these costs sets the 
maximum limit of the freight charge between A and B, 
and this may exceed the cost of this service and leave 
a profit for the carrier who uses this route. 

Freight Charges and Value. — The return for a 
productive operation of any kind whatsoever is 
directly based on the value which it imparts to some- 
thing ; and in the case of carrying, the value is meas- 
ured by the amount of "place utility" which the 
carrying creates. This is merely one application of a 
universal law. What the goods are worth where 
they are consumed, less what they are worth where 
they are made, equals what can be had for moving 
them from the one point to the other. Freight 
charges are gauged by the principle of "value of 
service," but so also are the charges for making the 
goods. When things are produced and used at the 
same place, the producer's returns equal the value of 
his product, and this is fixed by the principle of final 
utility. It is, however, a truism of economics that 
this value itself tends under competition to conform 
to the cost of creating it. In our illustration the 
manufacturing returns are fixed by the value of ser- 
vice and also by the cost of service, and so are the 
returns for transporting the goods from C to B ; but 
the returns for carrying them from A to B, where 
monopoly prevails, are not governed by the cost of 
service but by costs elsewhere incurred. 

Freight Charges and Cost. — The law of costs as 
well as the law of value holds good, in general, in 
connection with transportation. Competition in this 



PRINCIPLES OF TRANSPORTATION 405 

department tends to bring values created to a cer- 
tain equality per unit of cost and to reward the labor 
and capital which are used in carrying as well as they 
are rewarded elsewhere, and not better. If our table 
of industrial groups were elaborated, there would be 
between A and A', as well as between A' and K" , and 
between adjacent subgroups throughout the 
chart, a symbol which should represent the -^ 
work done by the carrier ; and the fact would t", 
appear that naturally this work is neither a 
favored nor injured in the apportionment of 
rewards. Free competition, if it existed in perfection 
everywhere, would be a perfectly undiscriminating 
distributor of earnings, and would apportion all re- 
turns according to costs. 

Variations of Freight Charges from Static Standards. 
— Place values are not an exception to the general 
rule of value ; and yet freight charges actually remain 
at a greater distance from the standards furnished by 
the direct costs of carrying than do the returns for 
other services from corresponding standards. There 
is an approach to monopoly in this department, and, 
when direct competition exists, it is a more imperfect 
process here than it is elsewhere. Moreover, the 
costs which here figure as an element in the adjust- 
ment of freight charges are of a peculiar kind, which, 
although not unknown in other departments of 
production, have nowhere else so great influence and 
importance. The study of railroads and their 
charges is baffling, not because the economic forces 
do not here work at all, but because here they en- 
counter a resistance which is exceptionally strong and 
persistent. The quasi-monopoly which elsewhere con- 
tinues only briefly lasts long in this department of 



406 ESSENTIALS OF ECONOMIC THEORY 

production; but it is subject to the same principles 
which everywhere rule. 

The Modes of Approaching the Study of Freight 
Charges. — In studying freight charges we may, if we 
choose, start with the intricate tariffs of railroads, as 
they now stand, and try to find some principle which, 
if applied, would bring order out of the mass of capri- 
cious and inconsistent rates. Such a rule will ulti- 
mately be needed, but it can best be obtained by 
examining at the outset the transportation which is 
done by simple means and under active competition. 
It will be found (1) that basic principles apply to all 
transportation whether it be by railroad or by simpler 
means; (2) that in the early development of every 
system of common carrying the action of these prin- 
ciples is disturbed; (3) that in the case of the more 
primitive systems the disturbances are soon overcome, 
but that they continue longer and produce far greater 
effects in the case of railroads; (4) that one impor- 
tant influence of this kind tends naturally to disap- 
pear, while another continues and calls for regulation 
by the state ; and (5) that this regulation needs to be 
based on natural tendencies and to conform to the 
laws which, when competition rules, govern the returns 
of all classes of producers. 

A Typical Instance of Partial Monopoly in Trans- 
portation. — We may now trace the development out 
of a purely competitive condition of a simple instance 
of what is usually termed monopoly, though in a rigor- 
ous use of terms it can hardly be so called. It is a 
monopoly the power of which is limited. So long as 
goods made at A are carried to B by some primitive 
method which insures the presence of competing car- 
riers, the returns for carrying will tend only to cover 



PEINCIPLES OF TRANSPORTATION 407 

costs. By a normal adjustment the price of the 
goods at A only repays the costs of making them, 
and if these and the carrying charge amount to less 
than the costs of making the goods at C and trans- 
porting them to B, none of them will come to B in 
this latter way. Makers at A and carriers on the 
route from there to B will possess the market, and the 
place value which the goods acquire when taken to B 
will be fixed directly by the costs of carrying. 

It is when there is no effective competition on the 
route between A and B, while there is free competi- 
tion in making the goods both at A and at C, and also 
in carrying them from C to B, that a typical case of a 
partial monopoly is presented. 

The price of the goods at A is a definite amount 
fixed by competi- 
tion between pro- 
ducers, and the 
price at B is also 
a definite amount 
fixed by competi- 
tion between different makers at C and between 
different carriers between C and B. The difference 
between these amounts sets the limit of the charge 
for carrying from A to B ; but in that operation there 
is, for a brief period, no effective competition. For 
simplicity let us say that this carrying is at first done 
by a single wagon owned by its driver, and that his 
charge for the service he renders nearly equals the 
difference between the cost of making the goods at A 
and that of obtaining them at B from some alternative 
source. This lone and honest driver is thus illustrat- 
ing the practice of the modern railroad, in that he is 
"charging what the traffic will bear." The goods he 



C 

> o 



MONOPOLISTIC CARRYING 



408 ESSENTIALS OF ECONOMIC THEORY 

transports have one natural value at A and another at 
B. These two values are determined separately and 
in ways that are quite independent of the carrier and 
his policy. When he begins to do his work, he charges 
an amount which about equals the difference between 
the two values. 

The Impossibility of Long-continued Profits in the 
Case of Primitive Carriers. — With the growth of 
traffic direct competition will soon appear. A second 
wagon will be put on the route and then more, and 
the strife for freight will bring down the charges 
to the level of cost. For a brief season a favored 
drayman was able to get nearly the entire difference 
between the value of the goods at the point where 
they are made and their value at the point where 
they are used, as these tivo values were determined by 
independent causes with which he had nothing to do. 
Now, he and his rivals can, indeed, get the difference 
between the value of the goods at the one point and 
their value at the other; but this difference is now 
directly determined Jby the carrying charge. That 
charge, again, is determined by the cost of rendering 
the service. There was a brief interval when the value 
of the service and the cost of it were different amounts ; 
but now they coincide. We shall see that the essen- 
tial difference between carrying by primitive means 
and carrying by railroad is in the fact that in the 
latter case the period when value and cost are differ- 
ent is greatly prolonged. 

The Appearance of a More Efficient Competitor. — 
With the growth of traffic a sailing vessel comes into 
use on a route connecting A with B, and the cost of 
thus conveying goods is less than that of conveying 
them over the roadway. The charge made by the 






PRINCIPLES OF TRANSPORTATION 409 

sailing vessel is lower than that made by the teamsters, 
and the goods are thus delivered at B cheaply enough 
both to attract to the water route all carrying from 
A and to put an end to all carrying from C. The for- 
mer carriers be- 
tween B and C 
lose their busi- 
ness, and the 

makers at C lose ^BAtjooNEpjouTj b 

some part of x ^ J 

theirs, in the \ -'""^^-^y^^ 

, , , WATER ROUTE USED 

same way that 

any producer loses the traffic when he is underbid 
by rivals. The public is the gainer to the extent of 
the reduction which takes place in the cost of the 
goods as delivered to consumers in the market at B; 
nevertheless, the situation still involves a limited 
monopoly. The sailing vessel now has no effective 
rival, and can charge "what the traffic will bear," 
and that is very nearly the cost of conveying the goods 
by wagons. The advent of the vessel has benefited 
the public; yet it is regarded as constituting a new 
monopoly, and the benefit which the public gets is 
less than it will get when a really effective competitor 
of the sailing craft makes its appearance. 

A Princi'ple governing Charges by Unequal Com- 
petitors. — The principle which, in this instance, 
governs the freight charges is one which is active in 
all departments of production. We have seen that 
a maker of goods who has just acquired a monopoly 
of a superior method may, for a time, charge what the 
goods cost as made by inferior processes. If the 
manufacturer has some patented machinery which 
effects a great economy, he is not at once obliged to 



410 ESSENTIALS OF ECONOMIC THEORY 

govern his prices by what the goods cost in his own 
mill, but may charge about what they would cost if 
they were made by the inferior machinery which he 
formerly used. This is what they still cost in the 
mills of certain rivals, and it thus appears that com- 
petition of a sort fixes his price for the goods he creates, 
but it is the competition of less capable producers and 
fails to benefit the public as the rivalry of equals 
would do. If there is evil in such a monopoly as 
this, it is not because the public is injured by the 
advent of the cheaper method. The improvement 
usually begins to confer benefit on consumers at the 
moment of its arrival, through the effort of the effi- 
cient producer to secure traffic. It causes the prices 
to go down, though the fall is at first only a slight one, 
and the consumer's case against the monopoly of 
method is on the ground of his failure to receive a 
further benefit. He will get that further benefit when- 
ever a producer who can compete on even terms with 
the one who now commands the field shall make his 
appearance. 

Unequal Competition Typical of Carriers. — Our 
recent illustration represents a similar condition in 
carrying. The public gets a slight gain from the ad- 
vent of a sailing vessel; but it fails to get the fur- 
ther benefit that the advent of a second vessel will 
ultimately bring. For a time the freight charge 
stands nearly at what teamsters have charged. For 
cheaper rates the public must wait for the advent of 
another vessel. 

The Cause of the Partial Monopoly in Carrying. — 
There is nothing to prevent a second schooner from 
being put on this route, if the returns to be expected 
should warrant it. At the outset the new vessel 



PRINCIPLES OF TRANSPORTATION 411 

would get only about a half of the amount of traffic 
enjoyed by the first, and the rates would probably be 
reduced by the competition between the two. Until 
. the returns of the first vessel become large it has no 
rivalry to fear, but it is clear that its monopoly is held 
by a very precarious tenure. It is not likely long 
to enjoy the benefit of any charges which yield much 
profit. The growth of traffic will in due time bring 
the competing vessel, and the rule of returns that 
only cover costs will again assert itself. The owner 
of the first sailing craft has been able for a time to 
charge ''the value of the service" he has rendered, as 
that value was determined independently of his own 
action ; but now this value itself depends on his action 
and that of rival carriers using the same route, and it 
adjusts itself at the level of cost. 

The Effect of partly Unused Vessels for Carrying. — 
The case illustrates another principle which is equally 
general. The entrepreneur whose capacity for pro- 
ducing is only partially utilized may often take some 
orders at less than it costs to fill them, as cost is usu- 
ally understood, and he will still be the gainer. In 
manufacturing as well as in carrying there are " fixed 
charges"; there are costs which stand at a defi- 
nite amount which is independent of the volume of 
traffic, while other costs increase as the volume grows. 
These are the "variable costs," and they have to be 
further classified, since some of them do not increase 
as rapidly as the business grows, while others increase 
with the same rapidity as does the business. The 
makers of sewing machines, typewriters, reapers, and 
mowers, and indeed machinery generally, can usually 
increase their product without correspondingly in- 
creasing their outlay. They can make goods and sell 



412 ESSENTIALS OF ECONOMIC THEORY 

them in a foreign market at rates which would 
injure and might even ruin them if they were applied 
to the sales made in their own country. This fact 
is most obvious when the manufacturer's machinery 
is not all kept running or when it all runs only a part 
of the time. Increasing the output is then a par- 
ticularly cheap operation. When a carrier's facilities 
are partially unused — when a ship carries a cargo 
in one direction and returns in ballast, or when it 
sails on both trips with its hold only half full — it is 
ready to carry additional goods at a low rate pro- 
vided that this policy will not demoralize its existing 
business. In our illustration we have assumed that 
some merchandise is made at A and consumed at B, 
but it may well be that goods of some sort are pro- 
duced at B and consumed at A. There may be stone 
quarries at B and there may be need of stone for 
paving or building at A, and the vessel may carry a 
return cargo of this kind at any rate which does not 
greatly exceed the mere cost of loading and unloading 
it and be better off for so doing. If the entire differ- 
ence between the cost of the stone at B and the cost 
of producing it at A from some other source is a very 
slight one, the amount of it still represents all that the 
ship can get for carrying the stone. The utmost that 
the traffic will bear is this difference in costs ; and yet 
the business will be accepted, for the return exceeds 
the merely variable costs which it entails. The fixed 
charges, the interest on the cost of the vessel, and the 
outlay for raaintaining it do not need to be paid in 
any part from the returns of this extra business. 
They are already provided for. 

If instead of returning from B with a hold quite 
empty, the vessel made both voyages with a hold only 



PRINCIPLES OF TRANSPORTATION 413 

half full, the result would be similar. It would then 
be in a position to make a low bid for further freight 
in both directions. If this entails no cutting of the 
rates for carrying the original goods, the vessel can 
take further goods with advantage at any rate above 
the merely variable costs. 

Production which is Advantageous though it does not 
repay all Costs. — There are two general conditions 
under which it is advantageous, both in making goods 
and in carrying them, to extend production, though 
the further returns which are in this way gained do 
not cover all costs. First, the producer must have 
an unused capacity for making or carrying goods. In 
such a case it is possible to make or carry an increment 
of goods without entailing on himself an increment of 
cost that is proportionate to the amount carried. In 
his bookkeeping his original business is charged with 
costs amounting to a certain sum per unit of goods 
produced or carried. His further business is charged 
with a smaller outlay per unit. 

Secondly, it must be possible to demand separate 
and independent returns for the different increments 
of goods, so that cutting the rate charged for one part 
of the traffic does not entail cutting the rate charged 
for the other. In the case of a manufacturer this is 
secured, either by carrying some goods to a remote and 
entirely independent market, or by producing some 
new kind of goods the low price of which will have no 
effect on the sales or the prices of the other kinds. 
In the case of the carrier it is accomplished in a vari- 
ety of similar ways. He can take return cargoes at 
a low rate. If he stops at different ports along his 
route he can charge less for goods landed at certain 
ports than for those landed at others. He can classify 



414 ESSENTIALS OF ECONOMIC THEORY 

his freight and carry some of it at a rate at which he 
could not afford to carry the whole. With the growth 
of traffic, however, this condition tends to disappear. 
Its existence requires that the carrier should have 
facilities only partially used. As the ship acquires 
fuller and fuller cargoes, it ceases to be advantageous 
to fill the hold with goods which pay lower rates than 
others ; just as a mill, which may have run for a time 
partly on goods that yield a large return and partly 
on those which yield a small one, gradually discards 
the making of the cheaper goods as the demand for 
the dearer kind increases. The vessel which can get 
full cargoes of profitable merchandise will cease to 
devote any space to what is less profitable. In the 
end the ship in our illustration will be transporting in 
both directions all the first-class freight it can take, 
and will accept neither the stone nor the merchandise 
consigned to ports to which it can be carried only at 
the cheap rates. 

Result of Effective Competition throughout the Car- 
rier's Route. — The condition just described — that 
of full cargoes of profitable goods — inevitably at- 
tracts a rival vessel, and the ordinary effects of com- 
petition then begin to show themselves. The vessels 
pursue the same route, cater to the same traffic, and 
if they try to get business from each other, bring down 
their charges. The warfare may even bring them to 
reduce the rates to the level at which only variable 
costs are covered — a policy that, if persisted in, 
would bankrupt them both; and here, as well as in 
the case of railroads, there is a powerful motive for 
combining and ending the war. It usually causes 
a merely tacit agreement to "live and let live" — a 
concurrent refraining from the fatal extreme of com- 



PRINCIPLES OF TRANSPORTATION 415 

petition. The reductions, as made, have to be 
general and to apply to all parts of the traffic, and 
unless each part of the freight carried earns a pro 
rata share of the fixed charges incurred in the business, 
the traffic is carried at a loss. On the supposition 
which we have made — that the special and compara- 
tively unprofitable increment of carrying was dis- 
continued as soon as the first vessel could use its 
entire cargo space in transporting goods of a high 
class — the arrival of the second vessel may cause the 
less profitable carrying to be resumed, since there will 
not be enough of the better sort to afford two full 
cargoes. Moreover, a normal kind of competition 
will stop short of the warfare which drives both rivals 
into bankruptcy, and will leave the rates at a level 
at which the receipts of each carrier cover all his 
outlays.^ 

^ A full discussion of the limits of freight charges would 
take account of the fact that "what the traffic will bear" is 
an elastic amount. An infant industry will bear less than 
a mature one ; and moreover, a rate that it will bear without 
being taxed out of existence may be sufficient to stunt its 
growth. A railroad may be interested in hastening its growth. 
When goods have one cost at A and another at B, a railroad 
company may carry them from the one point to the other 
for less than the difference between the costs because it wishes 
the industry at A to grow and furnish freight. Farmers 
who are introducing a new crop in a section of country re- 
mote from a market may be encouraged by a rate for carry- 
ing which leaves them a margin of profit. It is when a branch 
of production has more nearly reached its natural dimen- 
sions that the charge for carrying its product tends to ap- 
proach its highest limit. 



CHAPTER XXIV 

THE FOREGOING PRINCIPLES APPLIED TO THE 
RAILROAD PROBLEM 

Simple Cases of Charging "What the Traffic mil 
Bear." — The value of a study of primitive carriers 
and their pohcy lies in the fact that it illustrates 
principles which apply to transportation by a com- 
plicated system of railroads, although in this latter 
case they are not easily discerned. Imperfect com- 
petition is what exists in the department of carrying. 
So long as a railroad is without any rival it may, in 
some cases, charge for moving goods from one point 
to another about as much as the cost of making them 
at the latter point exceeds the cost at the former. 
This is the simplest case of charging what the traffic 
will bear. Or, again, the situation may be dominated 
by producers at a third point who can make goods and 
get them carried to the place we may term the mar- 
ket for less than the cost of making them directly in 
this latter place. In such a case the road may de- 
mand nearly the amount by which the cost of making 
the goods at an accessible third point and moving them 
to the one which is their market exceeds the cost of 
making them in the place first named; and this is a 
slightly less simple case of charging what the traffic 
will bear. It is appropriating the difference be- 
tween two natural values neither of which the rail- 
road itself fixes. 

Charges based on Various Kinds of Cost. — The 

416 



THE RAILROAD PROBLEM 417 

charges of the railroad may be hmited by the com- 
petition of inferior carriers who use its own route, 
such as teamsters whose wagons use a pubhc high- 
way running parallel to its own track. Here charges 
are based on costs, but not on those which the rail- 
road incurs. They are the costs which the team- 
sters incur; and if the railroad has much business, its 
own costs are less and it makes a profit. The charges 
may be based on costs incurred by more economical 
carriers, like owners of ships, and in such a case the rate 
which the railroad can get may be less than its own 
costs, if these are figured in the simple way of dividing 
a total outlay by a total number of units of freight 
transported. The rate is based on the shipowners' 
costs, and these are so low as to bankrupt the railroad 
if it should reduce all its charges to such a level. It 
reduces them thus only on the particular route where 
competition by water is encountered, and keeps them 
elsewhere at the higher level. In the case of ship- 
ments by rail over such routes "what the traffic will 
bear" is determined by the low charges established 
by the ships; and this means that it is determined 
by a certain definite cost of carrying goods between 
the very points which the railroad connects. 

The Exceptional Importance of Fixed Charges in 
the Case of Railroads. — The railroad, in the case just 
noticed, carries its rates below costs, as these are com- 
puted in a simple way, but keeps the lowest of them 
somewhat above the variable costs vv^hich we have 
defined; and there appears the important fact that 
the fixed costs incurred by the railroad form an un- 
precedentedly large part of its total expenses. The 
interest on the outlay it makes for roadbed, track, 
bridges, tunnels, terminals, etc., is something for 

2e 



418 ESSENTIALS OF ECONOMIC THEOEY 

which there is no fair parallel in the case of wagons or 
ships. This is the first unique fact concerning rail- 
roads and their policy; and the second is that they 
continue very long in that intermediate state which 
we have illustrated by the ship which had only a par- 
tial cargo and was impelled to take some traffic at a 
special and low rate. For many years the railroad 
only partially utilizes its plant; and so long as that 
is the case its natural policy is one of drastic dis- 
crimination between different portions of its business. 
A third great point of difference between the rail- 
road and other carriers appears if, while its capacity 
is still only partially utilized, it encounters the direct 
rivalry of other railroads that are eager for business; 
competition then takes a shape which impels the par- 
ticipants irresistibly into some kind of combination. 
The union may be tacit or formal, and it may depend 
on personal relations or on some merging of corpora- 
tions ; but toward something that will make the rival 
lines act concurrently and with mutual toleration the 
situation impels them with unique force. 

The general features of railroad rates, then, are — 

(1) Some charges based on the difference between 
the natural value of merchandise at the point of origin 
and its value at the point of delivery, as this latter 
value is determined by causes independent of the 
rates charged for transportation between the two 
points ; 

(2) The adjustment of other charges according 
to costs incurred by independent carriers operating 
between the same points; 

(3) The exceptional importance of the railroad's 
"fixed costs" and the drastically discriminating 
rates to which this leads; 



THE RAILROAD PROBLEM 419 

(4) The irresistible motive for combination where 
direct competition appears between railroads con- 
necting the same points. 

We speak of the condition of railroads as an inter- 
mediate state because it is one out of which a natural 
development takes other carriers when their capacity 
for service is fully utilized. The same cause — a 
complete utilization of the plants — would have 
a like effect in the case of railroads; but the cause 
is so slow in coming into full operation that few per- 
sons think of it as affecting the problem at all. The 
problem of freight charges on railroads is usually 
regarded as if the intermediate state were destined 
to be perpetual. It is, however, entirely true that a 
full utilization of the plants of railroads would tend to 
take them out of this state. If the increase of busi- 
ness came after a combination had been effected, it 
would tend to put a stop to the sharp discriminations 
to which the eager quest for traffic has led. Different 
shippers could more easily secure equally favorable 
treatment. Freight of a low grade would be less 
desired, since the space it would require might other- 
wise be available for business of a more profitable 
kind, and the rates on such freight would rise. The 
increased traffic would make it possible to earn large 
dividends without increasing charges on the lower 
grades of freight, and while greatly reducing the 
charges on the higher grades; but no economic 
force would be available for securing this adjustment. 
The state, by positive regulation, might secure it and 
might bring the earnings and the charges of the rail- 
roads more or less nearly to the normal standards 
which prevail where competition rules ; but if com- 
petition were here to begin, it would result quite 



420 ESSENTIALS OF ECONOMIC THEORY 

otherwise. It would restore the old condition of par- 
tially utilized cars, track, etc., and cause a new strife 
for traffic, which would cause some freight to be taken 
at very low rates, but would lead to inevitable con- 
solidation and higher charges. 

In general industry competition tends so to ad- 
just prices as to yield interest on capital, wages for all 
varieties of labor, including labor of management, 
and nothing more, and this is the outcome elsewhere 
demanded by a growth of business coupled with a 
theoretically normal and perfect action of com- 
petition; but the peculiarities of competition be- 
tween railways do not bring about the evolution which 
would give this result. Combination is effected long 
before the returns from the total traffic are made 
normal and before the returns from different parts of 
it are brought into their legitimate relation to each 
other. After the union of rival companies, railroads 
continue to be in that intermediate state in which the 
effect of an unused capacity for carrying has its nat- 
ural effect in charges which discriminate widely be- 
tween different localities and between different kinds 
of freight. The railroad traffic does, indeed, begin 
to follow the course which we have illustrated in the 
case of transportation by water. It takes a few 
steps in that direction, but further progress is then 
stopped by combinations. 

The fundamental laws of economics still apply. 
The static standard of freight charges exists, and 
one can form some idea of what actual charges would 
be if the forces which elsewhere tend to bring prices 
to their theoretical standards could here operate 
unhindered. The hindrances, however, are such as 
definitely to preclude such a result. The rates do 



THE RAILROAD PROBLEM 421 

not become in a true sense normal. Even under 
such active competition as at times exists they do 
not become so, while without competition they never 
tend to become so. It would, however, be a gross 
mistake to assume that static standards have no ap- 
plication whatever to railway transportation. The 
whole subject is most easily understood when those 
standards are first defined and the baflfling influences 
which prevent actual rates from conforming to them 
are then separately studied. There are influences 
which bring the various charges of railroads within 
a certain definable distance of normal standards. 

The situation of railroads we take as we find it 
— one of complete consolidation in case of many 
roads, and of harmonious action, or quasi-consolida- 
tion, in the case of others. In general their charges 
are fixed by the place value they create, as that 
value is established by influences other than the 
charges themselves. It might seem that the charge 
for carrying fixes 

the place value. 9 

Whatever a rail- 
road demands for 
carrying goods 
from A to B 
measures the en- 
hanced value 

which they get in the moving; but if they would 
have possessed at B the same value that they now 
have, even though the railroad had not existed at all, 
it is evident that it is this value minus the value of 
the goods at A which fixes the charges for carrying, 
rather than that these charges fix the place value. 
We have seen in very simple and general cases how 



Z Ul 

O H 

a 3 

z o 




WATER ROUTE 



422 ESSENTIALS OF ECONOMIC THEORY 

this principle works, and have now very briefly to 
trace the working of it in the case of a system of 
railroads. The special method of reckoning costs to 
which we have referred is an important element in 
the process. 

"Costing" comparatively Simple in the Book- 
keeping of Competing Producers. — In the study 
of ordinary industries we have encountered condi- 
tions which render the bookkeeping of a producer 
simple and cause him to charge all his costs, in a 
pro rata fashion, to his entire product. If his goods 
and those of his rivals are of one kind and are sold 
in a single market, a cut in the price of any one 
portion of the product involves a corresponding 
cut on the entire output. It is not possible to 
single out any particular increment for a reduction 
of price and leave the rate unchanged on the re- 
mainder. Where products are of different kinds 
it is possible to make a classification of them so as 
to get a large profit on some, a small one on others, 
and none at all on still others. When competition 
has not done its full work, something of this kind 
happens in many departments of business. A 
condition of unequal gain from different portions 
of an output lingers long after some effects of com- 
petition have been realized. In the end, however, 
it must yield if competition itself does its complete 
work, and whenever we adhere heroically to the 
hypothesis of the static state, we preclude this 
inequality of charges. Rivals who contend with 
each other for profitable business bring the prices 
of the goods which afford the most gain to such a 
level that a mill which makes this type of goods 
will pay no more in proportion to its capital than 



THE RAILROAD PROBLEM 423 

one which makes other types. The total cost of 
production, fixed and variable alike, would at that 
time, as we have seen, be barely covered, and might 
correctly be apportioned in a 'pro rata manner among 
all parts of the product. 

The Effect of Increasing Business on Comparative 
Charges. — Competition of this perfect kind does 
not exist in manufacturing and is far from existing in 
the department of carrying, and it is important to 
know whether with growing business and greatly 
tempered rivalry there is any tendency toward the 
equalization of charges and the simplifying of the 
mode of reckoning costs. When a mill has more 
orders than it can fill, those it wishes to be rid of 
are the ones which yield the smallest profit. They 
encumber the mill and prevent the filling of more 
profitable orders; and the natural mode of reducing 
the amount of this undesirable part of the output 
is to raise the charges on it. This comes about 
without much aid from competition, for when all 
producers find their capacity overtaxed, they have 
no motive for contending sharply for business. 
Underbidding has for its purpose attracting business 
from rivals and is an irrational operation when 
all have orders enough and to spare. Competition 
is largely in abeyance when the business any one 
can have is overabundant. 

These Principles Applicable to Carrying. — What 
we here assert concerning goods manufactured by 
independent mills would be true of goods carried 
by independent vessels, if they plied between the 
same two ports with no intermediate stops. If 
their capacity should at any time be overtaxed, 
they would not reduce the charges on higher grades, 



424 ESSENTIALS OF ECONOMIC THEORY 

but they would raise them on the lower grades, 
and the classification of freight would lose some 
of its significance. The lowering of the charges 
on the high grades of freight would come when the 
profits of the business should attract new carriers, 
who would naturally seek for the traffic that paid 
the best, till all kinds paid about alike. The mode 
of reckoning costs might then become simple — 
a pro rata division of total outlays among all parts 
of the business. 

The Condition of Uniform Costing never realized 
upon Railroads. — Not a single one of the essential 
conditions of equalized charges and uniform costing 
is now realized upon railroads, and there is only one 
of them that is approximated. Separate markets 
for different parts of the traffic are provided by the 
nature of the business. Every point to which 
goods are conveyed furnishes such a distinct market, 
and the service of carrying goods to it is paid for 
by a distinct set of customers. It follows, there- 
fore, that some rates can be cut without affecting 
others, and they regularly are so. The second con- 
dition, that of bringing the carrying capacity of 
railroads into the fullest possible use, is attainable, 
but it is very remote. At times there is a congestion 
of freight and, in general, the capacity of existing 
plants is more nearly used than it heretofore has 
been; but by an addition to the rolling stock they 
could carry more than they do and the additional 
traffic would cost far less than the portion already 
carried. Moreover, with no addition to the rolling 
stock, very considerable enlargements of traffic 
could at many points be made. Thirdly, com- 
petition between railroads is not at present effective 



THE RAILROAD PROBLEM 425 

enough to bring about a reduction of the higher 
charges and make returns and costs simple. Com- 
bination takes place long before the discriminating 
charges are abandoned. Low-grade freight con- 
tinues to be carried side by side with the high-grade 
which pays better. Charges to terminal points 
continue to be low, while charges to intermediate 
points are high. In a sense one may say that a 
tendency to discontinue these practices exists, but 
it is a tendency that is so effectually resisted that 
its natural results are only in small part realized. 
If a dam is built across a reservoir, holding the waters 
on one side ten feet above those on the other, one 
may say that the waters have a tendency to reach 
a uniform level, since the power of gravity is ex- 
ercised in that direction; but the dam baffles the 
tendency. And so in railroad operations some- 
thing interferes which checks the force of competi- 
tion or removes it altogether, long before the dis- 
criminations in freight charges are removed or very 
much reduced. 

An Intermediate State made relatively Permanent. 
— As we have said, the condition of traffic on rail- 
roads is analogous to what in the case of manu- 
facturers and primitive carriers would be regarded 
as a transitional state soon to be left behind; but 
in the case of railroads it is relatively permanent. 
It is the condition in which certain natural economic 
forces are working vigorously, and, if they were not 
counteracted by. other forces, would end by mak- 
ing natural adjustments and establishing normal 
rates for the carrier as well as the manufacturer. 
In this intermediate state the natural forces are 
counteracted and the adjustments are never made, 



426 ESSENTIALS OF ECONOMIC THEORY 

and what we have to study is the degree in which 
they are approximated. 

A Simple Case of Special Costing Applied to 
Certain Traffic. — We will suppose A and B are 
connected by a railroad, while C and B are connected 
by a highway over which transportation proceeds 
by the primitive means of horses and wagons. It 
is like one of the cases we have already stated, with 
the exception of the fact that the carrier over the 
longer route is a railroad. The limit of what the 

railroad can get 
is the natural 
difference be- 
tween the cost of 
making the goods 
at A and the com- 
bined costs of making them at C and carrying them 
to B. This definitely limits the railroad charges. 
Whatever difference of cost there is the railroad 
can get if it chooses, and barring any deduction 
it may make in order to induce production at A and 
make traffic for itself, it will get it. The rate which 
is fixed for the railroad may be sufficient to cover 
the total costs chargeable to this portion of its traffic 
on the simple and pro rata plan of costing, or on the 
other hand, it may cover only a portion of the fixed 
costs or no portion at all. This means that the 
standard which is set by the differing values of the 
goods at A and at B may or may not yield a profit 
to the railroad. If it is so slight as not to cover 
even the variable costs of carrying the goods, the 
railroad will not carry them, and the supply will 
be allowed to come from C rather than from A. 
If it covers more than these variable costs, the road 



THE RAILROAD PROBLEM 427 

will accept and carry the goods. If the traffic affords 
any appreciable margin above the variable costs, it 
will be the policy of the railroad to make its charges 
low enough to attract the traffic, and this will slightly 
reduce the place value of the goods at B and bring 
it below the cost of procuring them from C. The 
railroad will thus secure the whole traffic to the 
exclusion of that which came from C. If the costs 
of making the goods at A and C are alike, then the 
charge for carrying from A to B will be just enough 
below the total costs of carrying in wagons from C 
to B to stop the carrying over this shorter route and 
appropriate the whole business; but this charge 
may not cover total costs of carrying from A. It 
may yield only a slight margin above the variable 
costs attaching to this part of the railroad's business. 
It thus appears that this carrier can with advantage 
accept the freight at a rate that by a perfectly normal 
bookkeeping is below cost, while the teamsters on the 
road from C cannot do this. 

A Second Case in which Carrying is done for Any 
Amount above Variable Cost. — Let us now suppose 
there is a railroad from C to B as well as one from 
A to B. There is 

now competition ^ 

between makers 
at A and carriers 
from A to B, on A „,„„„,„ 

' RAILROAD 

the one hand, and 

makers at C and carriers from C to B, on the other 
hand; and whichever of these quasi-partnerships 
delivers the goods at B at the cheaper rate gets the 
whole traffic. By the terms of our supposition the 
makers in both places are offering goods at cost. 



428 ESSENTIALS OF ECONOMIC THEORY 

and any cutting of rates that is to be done must 
be done by the carriers. To reduce the prices of 
the goods at the mills in either locality would put 
some of them out of business. We will assume 
that there is no consolidation and no other means 
of concurrent action between the railroads, and 
that the whole traffic will thus go to the route over 
which the lower rates are made. For simplicity 
we will still adhere to the supposition of equal costs 
for manufacturing and of unequal costs for carrying. 
As the charge for carrying goes down, one or the 
other of the railroads will reach the point where 
the variable costs of this traffic are barely covered, 
while on the other line they are more than covered. 
Where rivalry is not tempered in any way what- 
ever, the charge made by competing roads falls to 
a level at which returns only cover the variable 
costs incurred by one of the competitors, though 
it may return somewhat more in the case of the 
other. 

How Fixed Costs are Met. — This implies, indeed, 
that the fixed charges of both roads must somehow 
be met by the returns from other traffic; and this 
supposition is in accordance with the facts. A 
freight war may temporarily carry rates to a level 
where some traffic does not cover variable costs and 
where total traffic falls short of covering total costs. 
Such a situation cannot long continue, and the natu- 
ral adjustment, under active competition, is one at 
which rates on the traffic for which the two lines 
are contending are just below the variable costs 
incurred by one line but above those incurred by 
the other. There is nothing to prevent the stronger 
railroad from thus reducing its rates, attracting 



THE RAILROAD PROBLEM 429 

to itself the whole of the traffic, and putting an end 
to the rivalry of the other line. This would mean 
bankruptcy for that liiie unless it had other sources 
of income. 

The Effects of Bankruptcy on Costs. — Bank- 
ruptcy means a scaling down of the fixed charges 
of the railroad to such a point that the total traffic 
can meet them; but it does not enable the com- 
pany to reacquire business that will not yield enough 
to cover variable costs. Adhering to the supposi- 
tion that there is no mutual understanding, no pool, 
and no other approach to consolidation between 
the rival lines, we may safely say that the general 
rule which elsewhere governs rates holds true here. 
Two roads actively competing for identically the 
same traffic tend to bring charges to a level at which 
the variable charges entailed by this traffic on the 
one route are not quite met and the traffic passes 
to the other line.^ 

A Principle ^ 

governing Com- 
petition between 
Railroads and 
Carriers hy Sea. — 
In a third case 
there may be be- 
tween A and B a railroad and a water route also, 
while between C and B there is a railroad only. On 
the supposition we have made, — that competition 
between carriers by water has done its full work, — 

' If we wish to vary our supposition that the cost of mak- 
ing the goods at A and at C is the same, we have a modifica- 
tion of the case we have stated. If it is much cheaper to 
make them at A, the railroad that carries these goods from 
there to B may charge more for carrjdng than does the one 




WATER ROUTE 



430 ESSENTIALS OF ECONOMIC THEORY 

the charge for carrying anything by water from A 
to B must be sufficient to cover a pro rata part of 
the total costs. That may be sufficient to cover the 
merely variable costs entailed on the railroad, or it 
may not. If it does not, the railroad will not take 
any portion of the business except what it may 
take by reason of the greater speed with which it can 
transport the goods. If, however, the total costs of 
carrying by water exceed by a tolerable margin the 
merely variable costs of carrying by land, the railroad 
will be able to take the traffic. If this traffic goes to 
the water route, the charge made by the railroad from 
C to B is adjusted by a simple rule. This railroad 
can get the natural difference between the cost of the 
goods at C and the cost of similar ones made at A 
and carried by water to B. If the railroad gets 
the traffic between A and B, and the water route 
is abandoned, the case becomes the same as that 
which we have already considered, — the trans- 
porting is done at a rate which prevents one of the 
lines from covering its merely variable costs and 
secures all the traffic for the other line. The carry- 
ing from A to B goes by land or by water accord- 
ing as the variable costs, in the one case, or the pro 
rata share of total costs, in the other, are the less; 
and nothing can be carried from C to B unless it 
can be delivered at B at a price as low as that of 
goods made at A and transported at the rate just 
described. If the costs of making at A and C are 

that delivers the goods made at C. It is possible that the 
difference between the costs of making at the different points 
may tell decisively in favor of the longer route, and it may 
be the railroad from C to B that first reaches, in its charges, 
the level of variable costs and sees its traffic handed over to 
its rival. 



THE EAILROAD PROBLEM 431 

equal and there are the three carriers seeking traffic, 
as assumed, the result naturally is to give all the 
business to the one who will bid the lowest for it. 
Either railroad will bid as low as the variable costs 
which the traffic occasions; while the owners of 
ships will bid no lower than the rate which covers 
costs of both kinds. ^ 

The Case of Railroads having Common Terminal 
Points. — In the fourth case there are, besides the 
other carriers, two railroads between A and B which 




compete for the traffic at these terminal points, 
but not at intermediate ones. Their facilities for 
through traffic are alike. The local traffic on the 
different lines is unlike, since it is affected by the 
character of the regions through which the railroads 
pass; but the charges made for local traffic are 
governed by the comparatively simple principles 
which we first stated. In contending for freight 
to way stations we may say that the railroad has 
to compete with wagons upon the highway, but 
with nothing more efficient. The charges for local 
freight may therefore be extremely high, while, 

' If carriers by water are in that intermediate state in 
which their capacity is only partially used, they also may 
offer to take some traffic for an amount which only covers 
variable costs; but this condition does not naturally be- 
come in their case semipermanent, as it does in the case of 
railroads. 



432 ESSENTIALS OF ECONOMIC THEOEY 

if the railroads are really competing as vigorously 
as pure theory requires, and if the normal results 
of competition are completely realized, the rate 
which can be maintained between A and B for any 
articles carried will be no higher than those which 
cover the variable costs entailed on the route which 
is the less economical of the two. The line to which 
this test assigns the traffic between A and B must 
then stand the further tests we have described — 
those involved in contending for business with 
carriers using respectively the water route and the 
railroad from C to B. 

A Condition leading to a Reduction of Fixed Costs. 
— It is safe to assume that one of the two railroads 
from A to B has more local traffic than the other. 
It may be that even with this advantage its total 
returns of all kinds may fall short of covering its 
total outlays. In that case the total returns of 
any less favorable route must fall still further short 
of the amount necessary for covering all outlays; 
and if we adhere to the assumption that neither 
consolidation nor anything resembling it takes 
place, we have a case in which both railroads must 
undergo reorganization. The fixed charges of the 
better route must be scaled down and the creditors 
of this railroad must accept the loss, while on the 
other route the nxed charges must be reduced still 
more and the creditors must suffer a larger loss. 
It goes without saying that the prospect of such 
a calamity means consolidation. It is evident 
what alternative competitors face in cases in which 
heroic competition goes on to the bitter end. As 
a rule this is an unrealized alternative. The mere 
prospect of the calamity connected with it is bad 



THE RAILROAD PROBLEM 433 

enough to put an end to the independent action 
of the different railroads. With the faciUties for 
combination which now exist a far smaller induce- 
ment suffices to bring this about. 

Tlie Case of Railroads whose Entire Routes are 
Parallel. — We have to consider only one more 
typical case in order to have before us a sufficient 
number to establish the general principles which 
govern the charges for the carrying of freight by 
railroads. Variations innumerable might be stated; 
and, indeed, the experience of the railroad system 
of this country affords the variations and reveals 
the results which follow from the conditions they 
create. The railroads may be strictly parallel 
lines, pursuing the same route and competing for 



local traffic as well as for through traffic. If the 
case we lately examined insures consolidation, — 
and indeed all of the cases we have stated impel 
the companies powerfully toward it, — this last 
case makes assurance doubly sure. Strictly parallel 
railroads competing for traffic over their entire 
routes and neither uniting nor showing any of the 
approaches to union would be an impossibility. 
Persistent competition would .then mean reducing 
all charges to the level fixed by variable costs, which 
would leave no revenue whatever to cover fixed 
costs, and would send the companies into a bank- 
ruptcy from which even reorganizations could not 
relieve them, since they could not annihilate all 
the fixed costs. 

2f 



434 ESSENTIALS OF ECONOMIC THEORY 

A Case of Arrested Development. — It is clear that, 
in the entire poHcy of railroads, the fact that their 
capacity has never been fully used plays a highly 
important part. It makes the distinction between 
fixed costs and variable ones a leading element in 
the adjustment of charges. With the capacity 
of railroads completely used, as is that of a ship 
which carries a full cargo at every voyage, the dis- 
tinction would lose most of its importance. More 
business would then require an addition to every 
part of the plant and would thus entail new fixed 
costs which would have to be charged against the 
new business. As the traffic of any railroad grows 
toward its maximum, the cost which each separate 
addition to it entails grows larger and larger. When 
cars are few and are only half filled, an increment 
of traffic entails a very small increment of expense. 
When the cars are filled and new freight requires 
the purchase of more of them, the cost of this ad- 
dition to the traffic becomes greater. When further 
additions to the freight carried require additions 
to trackage, yard room, storage room, etc., they 
cost far more than the earlier additions; and new 
increments of freight come, in the end, to cost very 
nearly as much per unit as the general body of the 
previous traffic when all outlays were charged 
against it. The railroad approaches the condition 
of the full ships referred to, in which further cargoes 
require further ships, with all the outlays which 
this implies. The distinction between different kinds 
of costing is gradually obliterated, and railroads 
steadily draw nearer to that ultimate state which 
other carriers more quickly approach, in which 
each part of the freight carried must bear its share 



THE RAILROAD PROBLEM 435 

of the total costs entailed. Long before that state 
is reached, however, combination ensues, and the 
movement of freight charges toward their static 
standard is arrested. 

The Standard of Freight Charges under a Regime 
of Monopoly. — A consolidation so complete that it 
would merge all rival lines under a single board of con- 
trol and pool all their earnings would restore the early 
condition described in connection with one of our 
illustrations — that of the single railroad between 
A and B, having only sailing vessels and wagons as 
rivals. It is 
able to charge 
what the traffic 
will bear in a 
simple and 
literal sense. 

The consoli- water route 

dated lines can, if they choose, get for each bit of 
carrying the difference between the value of goods at 
the point where they are taken and their value at 
the point where they are delivered. These values 
are approximately what they would be if no railroad 
existed. The carrying done by the railroad itself does 
not enter into the making of them. The natural value 
of a commodity at A is what it costs to make it there, 
and the value at B is either the cost of making it at B, 
or that of making it at C and carrying it in wagons to 
B, or that of making it at A and carrying it by water 
to B. In any case there is a natural and simple pro- 
cess of fixing the costs both at A and at B, and the 
difference between them is the limit up to which the 
railroad can push its charges if it will. Where the 
business which furnishes the freight is not fully devel^ 



436 ESSENTIALS OF ECONOMIC THEORY 

oped, the railroad may moderate its charges for the 
sake of letting it grow larger. The hope of in- 
creased traffic in the future may cause a reduction of 
demands in the present. We shall see what other in- 
fluences may keep the charges below their possible 
level; but the natural difference between two local 
values of goods is the basis of the charge for carrying 
them from one point to the other. Consolidated 
lines, if they had as perfect a monopoly of carrying 
by railroad as has the single line in our illustration, 
would base their charges on this simple principle, 
though for a number of reasons they might not take 
all that the principle would allow. 

How Imperfect Consolidation Works. — Imperfect 
consolidation, when it follows a period of sharp com- 
petition, has to deal with obstacles which prevent a 
complete carrying out of this policy. Many rates 
have become far lower than the rule of monopoly 
would make them, and there are difficulties in the way 
of raising them. A weak combination of parallel 
lines may keep its charges within bounds, partly 
from a fear that larger ones may afford too great an 
incentive to secret rate cutting and may so break 
up the union, and partly from a respect for what 
the people may do if the exactions of the railroads 
become too great. The more complete forms of con- 
solidation have not the former of these dangers to fear ; 
and if, without being restrained by the state, their 
charges continue moderate, it is mainly due to the fact 
that other lines less firmly consolidated are unable 
safely to make a radical advance of rates, and that this 
often prevents such a course in the case of lines which 
would otherwise be able to take it. 

Limits on the Charges of a System of strongly Con- 



THE RAILROAD PROBLEM 437 

solidated Lines. — This means that where a great 
system of railroads occupying the whole of a vast 
territory is so firmly consolidated as to have a com- 
.plete monopoly of carrying by rail within the area, 
it is still afifected in indirect ways by the possible 
rivalry of lines altogether outside of its territory. An 
excessive charge on freight from Chicago to New 
York might induce carrying by rail from Chicago 
to Norfolk and thence by water to New York. It 
might cause grain, flour, etc., to be shipped to Europe 
from Southern ports rather than from those on the 
Atlantic coast. These cases and others do not fall 
under principles essentially different from those 
already stated, but they call for the application of 
the same principles in complex conditions which our 
study is too brief to cover. There is a supposable 
case in which nearly all that could be secured by any 
railroad connecting Chicago with the Atlantic coast, 
even though every line in the territory between 
them were the property of one corporation, would be 
the variable cost of carrying goods over a line running 
to a port on the Gulf of Mexico. Reflection will 
easily show how the principles already stated apply 
to this case and others. 

Effects of a General and Strong Consolidation. — 
With all the lines in this country and Canada in a 
strong consolidation, the advance of rates to, or well 
toward, the limit set by the principle of natural place 
value created would inevitably come unless the 
power of the state should in some way prevent it. The 
railroads would be able to get the difference between 
the cost of goods at A, in the illustrative case, and the 
cost of making or procuring them at B without using 
the connecting line of railroad. When the appeal to 



438 ESSENTIALS OF ECONOMIC THEORY 

the state is only imminent, — when the power of the 
government is not yet exercised, but impends over 
every railroad that establishes unreasonable charges, 

— the rates may be held in a fair degree of restraint. 
A wholesome respect for the possibilities of lawmaking 
here takes the place of actual statutes. A respect 
for the law appears in advance of its enactment and 
may amount to submitting rates in an imperfect and 
irregular way to the approval of the state. This 
effect, when it is realized, is to be credited in part to 
laws which will never be enacted. The merely po- 
tential law — that which the people will probably de- 
mand if they are greatly provoked, but not otherwise 

— may be a stronger deterrent than the prospect of 
more moderate legislation. In general a considerable 
part of the economic lawmaking of the future will 
undoubtedly be called out by demands for action that 
is too violent to be taken except under great provo- 
cation. The dread of the extreme penalty insures 
a cautious policy in increasing charges which have 
been established under a transient regime of competi- 
tion. Partial monopolies adhering to rates many of 
which were established under the pressure of competi- 
tion — such are the railroad systems of America. The 
existing condition shows some of the effects of compe- 
tition which has ceased and of legislation which has 
not taken place. As the combinations shall become 
greater and stronger, the situation everywhere will 
become more and more akin to that which existed in 
a local way when a single line of railroad had no 
effective competition, and the charges which the traffic 
would bear were fixed in the way we have described 
and absorbed the place value which the carrying 
created. It is a method which exposes the public 



THE RAILROAD PROBLEM 439 

to an extortion which, though not unlimited, is un- 
endurably great. Consohdation, therefore, means 
the control of rates by the state; but it is essential 
that this control be exercised with due regard for the 
economic principles which rule in this department of 
industry. Thus only can there be secured the re- 
sults of a natural system unperverted by monopoly. 
The principles which a study of simple cases suffices 
to establish are as follows : — 

1. Freight charges are essentially a variety of price. 
They express the exchange value of place utility. 

2. The static standards or norms toward which 
these prices tend are fixed in the same way as are 
other static standards of value, — - by a rule of cost, 
— though in the case of railroads the working of this 
rule is exceptional. 

3. When carrying is done by simple means and by 
competing carriers, the ultimate basis of charges is 
the cost of the carrying; and this is estimated in the 
simple way in which, under perfectly free competi- 
tion, the cost of making commodities is estimated. 
The total outlay is charged against the total product. 

4. A single railroad between one point and another, 
when it is not affected by the rivalry of any other rail- 
road, can get for its service the difference between 
the cost of goods at the place where they are made and 
the cost at the point of delivery, on the supposition 
that they would either be made at this point or carried 
thither by more primitive means. Under such a par- 
tial monopoly the costs incurred by the railroad itself 
do not directly set the standard of its charges, but 
other costs do so. 

5. In this case the so-called variable costs incurred 
by the railroad furnish a minimum limit below which 



440 ESSENTIALS OF ECONOMIC THEORY 

its charges cannot go, but to which they tend to go in 
the case of traffic which cannot otherwise be secured. 

6. This place value which the railroad can confer on 
the goods is small (1) when the cost of making the 
goods at their place of departure is not much less 
than that of making them at their place of destination, 
or (2) when it is not much less than the cost of ob- 
taining them from a third point, or (3) when it is 
possible to carry them from the place of their origin 
to their destination by water or by any other cheap 
means of transportation. 

7. Variable costs are positive additions to the total 
outlays previously incurred by a railroad, and they 
result from adding a definite amount to its previous 
traffic. They are less than proportionate parts of total 
costs, including interest, some part of operating ex- 
penses, cost of maintenance of roadway, etc. 

8. The comparative smallness of the variable costs 
is chiefly due to the fact that the carrying capacity of 
railroads is only partially used. These costs become 
relatively larger as traffic increases, and would prac- 
tically coincide with proportionate shares of total 
costs if the traffic should reach its absolute maximum. 

9. If the place value above defined is large enough 
to cover the variable costs attaching to certain traffic 
and afford any surplus whatever, the railroad usually 
takes this traffic. 

10. On the business which it gets the charges 
vary widely and, as it appears, capriciously, but they 
are at bottom governed by the economic principle 
stated — that of place value as established in ways in 
which the charges of the railroad itself do not figure. 

11. Competing railroads tend to bring rates down- 
ward toward a minimum which is fixed by the merely 



THE RAILROAD PROBLEM 441 

variable costs of the carrying as done by one or more 
of the railroads themselves. 

12. The competition between railroads is arrested 
.while they are not using their full capacity, while the 
merely variable costs of an increment of traffic are 
still abnormally low, and while many rates are so. 

13. Railroads which compete for freight between 
terminal points are strongly impelled toward con- 
solidation; and those which compete along their 
entire lines are forced to resort to it. 

14. Consolidation in its more imperfect forms tends 
to establish rates that are abnormally high, but this 
tendency is somewhat checked by the danger that the 
combination may be broken by a desire to foster 
business in a section of country and by the indirect 
influence of lines outside of the territory controlled by 
the consolidated roads. 

15. In its stronger and more extended forms con- 
solidation leaves the people with no adequate safe- 
guard against extortionate charges except as this is 
furnished by the intervention of the state; and this 
needs to be effected with an intelligent regard for the 
natural forces which are at work amid the seemingly 
capricious irregularities in the present system of 
charges. 

The Aim of Regulation hy the State. — An aim of 
a government, in all of its economic policy, is to 
insure the best use of the national resources, and this 
can often be done by keeping alive free competition. 
Where the rivalry of producers is active, a law of 
survival guarantees that the more economical method 
of producing an article shall displace the inferior one. 
When the choice lies between using a quantity of free 
and disposable labor in making goods in a certain 



442 ESSENTIALS OF ECONOMIC THEORY 

market and using it in making them elsewhere and 
carrying them to the market, the alternative which 
gives society the most that it can get by any use of 
its productive resources is the one that is spontane- 
ously selected. 

How an Extortionate Local Charge may sometimes he 
reduced without Injury to a Railroad. — A low charge 
for freight carried from A to B coupled with an extor- 
tionate one from A' to B might preclude making the 
goods at A', though they can be made there at excel- 
lent advantage and the interests of society will soon 
require that they be so. This situation can exist 
only so long as traffic is slight between A and A' and 
greater between A' and B. The growth of traffic 
over the former section of the route will make it 
desirable for the railroad to raise its rate over that por- 
tion. If, under compulsion or otherwise, it reduces 

. g the rate from A' to B 

sufficiently to permit 
the production of the goods at A', it will gain a profit- 
able traffic between A' and B at the cost of giving up 
a relatively unprofitable one between A and B. 

Variable Costs a Proper Basis for Some Charges. — 
It makes for general economy to pay respect to the 
distinction between fixed and variable costs and let 
much freight be carried for anything it will yield above 
the variable ones. If ten units of labor are required 
for making an article at B and only five at A, and if 
a railroad between these points, whose capacity is 
not fully utilized, can carry the article from A to B 
with an expenditure of two additional units of labor, 
then society can best get the goods for use at B by 
spending these seven units in the making and carrying. 
It would take ten units to make them at B, and to 



THE RAILROAD PROBLEM 443 

society itself there is a saving of three units from 
making them at A and carrying them at a special rate 
to B. Till the railroad is more fully used for other 
purposes this source of economy will continue. 
Though the rates charged for this freight would bank- 
rupt the railroad if they were applied to its entire traf- 
fic, it is best for the railroad to take this special bit of 
carrying at any rate exceeding the wages of the- two 
units of labor ; and for the time being this is the best 
way to use some of the social resources, since it gives 
at the point of delivery and use more goods for a given 
outlay than could have been had in any other way. 

Why Consumers may suffer while Particular Pro- 
ducers may he Favored. — It will be seen that this 
principle affords an inducement for making a special 
classification of certain goods and carrying them for 
less than merchandise of a generally similar kind is 
carried for. It is a pohcy of ''making traffic" which 
costs little and is worth more than it costs both to the 
carrier and to society. This incentive for reducing 
charges does not operate as strongly in the case of 
goods carried to consumers who are forced to live on 
the route. They are held there by the general causes 
mentioned at the beginning of the preceding chapter, 
and must pay the tax which the railroad imposes on 
them. The only limit on this tax is the possibility of 
otherwise procuring the goods or of moving out of 
the territory. The ultimate possibility that popu- 
lation may not grow under a regime of extortion and 
that both freight traffic and passenger traffic may be 
held within small limits imposes some check on the 
railroad's exactions. The company may find it worth 
while to foster to some extent the growth of popula- 
tion ; and to favor producers of certain goods in order 



444 ESSENTIALS OF ECONOMIC THEORY 

to induce them to locate their establishments on its 
line, and the result of this may be good for society; 
but there is no way of securing a general good from 
the heavy tax on the rest of the traffic unless this has 
been necessary to insure the existence of the railroad 
itself. In that case there may be a temporary neces- 
sity for it, which will disappear as traffic grows. 

The Policy of the State in Dealing with Low Charges 
based on Variable Costs. — The interest of railroads 
which have a monopoly of their routes is to advance 
the rates on through traffic. We have noticed a pos- 
sible case in which some equalization of charges by 
occasional reductions of local rates takes place. An 
increase of charges over long routes not made nec- 
essary by any pressure of business which overtaxes 
the railroad's carrying power would of course be in- 
jurious. Moreover, carrying full loads does not con- 
stitute such an overtaxing as calls for the higher rates. 
There are times when present supplies of cars and 
engines may not be able to move more freight than 
they do ; but in that case more of them are called for. 
Only when the point is reached at which providing 
for this through traffic in addition to the local freight 
entails additions to the permanent plant and involves 
costs that exceed the return from the through busi- 
ness, is it justifiable, in the interest of social efficiency, 
to advance such charges. In preventing such an 
advance under other conditions a government helps 
to secure an approach to a natural economy and a 
maximum of production. 

When, in the Interest of General Productivity, a Re- 
duction of Local Charges is called for. — We saw that 
carriers of a primitive kind competing with each 
other would put every charge, local or otherwise, on a 



THE RAILROAD PROBLEM 445 

basis of its proportionate share of total costs. The 
traffic as a whole would return enough to cover all 
the outlays, and each part of it would yield its share. 
This is the ideal of effectiveness for railroads, as well 
as for ships and wagons. The attainment of the ideal 
without a regulation of charges by the state is never 
to be expected. One feature of this normal condition 
is that, where no special improvements have recently 
been made, total returns should just equal total costs, 
in the sense in which terms are used in static theory — ■ 
that sense in which all interest charges and all expenses 
of management figure among the costs. No net profit 
for the entrepreneur, but full interest for the capitalist 
and full wages for all varieties of labor, is the rule 
that gives the static measure of normal returns. 
If a state shall slowly reduce the charges for local 
freight, while holding unchanged those for through 
traffic, — all the while allowing the total returns of 
the railroads to cover what we have defined as total 
costs,— it will do all it can toward securing an ap- 
proximation to the condition which affords the largest 
product of social industry. It will help to make the 
resources of the people do their utmost in yielding an 
income. Total returns covering all costs, a reduction 
of those charges on local traffic which have prevented 
industries from springing up at intermediate points 
between favored centers, a gradual increase of local 
production without any positive repression of produc- 
tion elsewhere — such are some features of the gen- 
eral change which the future should bring and which 
only the power of the state can make it bring. 

How the State may secure what Competition secures 
in Other Fields. — In general industry the rivalry 
of entrepreneurs carries prices to a level fixed by costs, 



446 ESSENTIALS OF ECONOMIC THEORY 

but in transportation the rivalry has so largely dis- 
appeared as to prevent such an outcome. The state 
cannot restore much of the vanished rivalry and 
would cause an unnatural condition if it did so. We 
have seen toward what an abnormal level of costs a 
sharp "freight war" carries rates. What the state 
can do is something which an instinctive judgment 
of the people is impelling it to do; namely, to adjust 
rates directly and bring them gradually toward the 
standard to which competition, if it were working as it 
elsewhere works, would automatically bring them, 
namely, that at which wages and interest are fully 
covered. A surplus above these outlays could always 
be temporarily secured wherever a special economy had 
been effected, and the source of legitimate profit would 
be open to carriers as it is to producers generally. How 
much should be reckoned as interest depends on the 
question how the capital itself is estimated, and here 
again the instinct of the people has been correct. It 
will not accept as a measure of true capital the market 
value of all the stocks and bonds the railroad has 
issued. The quotations of the market make the 
total values of the stocks and bonds equal a capital- 
ization of its total earnings, and these may include 
a profit due to monopoly. If a state were to figure 
the capital in this way, and then so adjust rates as to 
allow ordinary interest on the sum thus computed, it 
would merely leave total returns as they are. It 
might change comparative charges, but not the sum 
total of all of them. 

How Capital should be Estimated. — In that static 
condition in which, as we have shown, capital is 
as productive in one subgroup as in another, the 
capital is first measured by the cost of the goods 



THE RAILROAD PROBLEM 447 

that, in the inception of the industry, embody it, 
and in static studies this cost is regarded as constant. 
Returns from different outlays are equah'zed, and 
a dollar invested in one kind of business then yields 
as much in a year as a dollar in any other. In 
a dynamic state the cost standard still prevails, 
and as the tools of production become cheaper, 
in terms of labor, it takes more of them to represent 
the same amount of capital that was originally 
invested. What it would at any time cost to du- 
plicate every item in the equipment of a business 
measures the capital it uses. Nothing but a failure 
of competition in the case of railroads prevents the 
application of this standard to them. Monopoly 
makes earnings more or less independent of sums 
invested and causes purchasers to buy stock at 
rates that are independent of costs of plant and 
equipment and are fixed by earnings themselves. 

The Process of Estimating Capital on the Basis of 
Cost. — If we undertake here to do by public author- 
ity what competition elsewhere tends to do, we 
shall have to restore the standard based, not on the 
original cost of the railroad's substantial property, 
but on the cost of getting another that would be 
equal to it in working efficiency. The plant is 
worth what it would naturally cost to duplicate 
it; and an average rate of interest on that sum is 
the natural return from it. There are ethical claims 
which are entitled to respect and which preclude 
any sudden reduction of the value of a railroad's 
properties; and, moreover, the end in view can be 
attained in a way that will not necessarily take 
anything from the absolute amount which they are 
now worth. If the amount of dividends remains 



448 ESSENTIALS OF ECONOMIC THEORY 

fixed, the increase in the actual value of the plant 
itself will bring these dividends into the proper 
ratio to it. The land that the companies use is 
becoming more valuable. Measured by what it 
would cost to duplicate it, it represents a larger 
and larger amount on the companies' inventories. 
If the equipment also is enlarged as traffic grows, 
the entire sum on which interest and dividends 
are computed becomes continually larger. If the 
interest and dividends earned by the plants now 
in existence remain fixed in absolute amount, they 
will become a smaller and smaller percentage of 
the real capital of the companies. Merely letting 
railroads earn the amount that they do at present 
would bring the net incomes after some years to 
the same rate — the same percentage of invested 
capital — that the income from other capital repre- 
sents. New plants and enlargements of old ones 
should be allowed to earn enough to furnish an 
incentive for providing them as fast as the needs of 
the public require it. 

How Insuring a Fixed Amount of Total Earnings 
would affect the Rates charged for Freight. — It 
goes without saying that the general increase of 
traffic, while the freight charges remain the same, 
increases the net earnings of the carrying companies. 
Therefore the policy of keeping the net earnings 
at a fixed total amount would mean a reduction 
of rates for freight and passenger service. We 
do not here raise the question how much reduction 
will be required for the purpose in view — that 
of transferring to the people at large whatever now 
constitutes a genuine monopoly profit. In the 
case of some lines there is, it is safe to say, no such 



THE RAILROAD PROBLEM 449 

profit, and it will be impossible to tell how much 
of it elsewhere exists till some careful appraisal of 
plants and equipments, on the basis of the cost of 
duplicating them, shall have been made. What 
we need to know is that, by the aid of such an ap- 
praisal, the state can, if it will, secure in the de- 
partment of carrying the result which is automati- 
cally secured elsewhere, namely, the prevalence of 
charges which afford normal returns on invested 
capital as well as wages for every kind of labor. 

Elements of the Problem not included in a merely 
Economic Study. — It will not fail to occur to any 
reader that in making the present study of railroads 
a very general and purely economic one we leave 
out of account some facts of great importance. We 
take no account of corruption within the corpora- 
tions which do the carrying, nor of corruption in 
the relation between them and the officials of the 
state. Stockholders within the corporation are likely 
to have their interests betrayed by those who are 
appointed to take charge of them, and citizens of 
the state are likely to have their greater interests 
betrayed, in a like manner, by their appointed 
custodians. We cannot here discuss the various 
plans by which directors plunder their own corpora- 
tions, nor the ways in which public officials betray 
the people. All of these abuses are disturbing 
influences in the economic system; and all of them 
interfere with the adjustment which gives the highest 
productive efficiency, and contribute a full share 
toward putting the social order in danger. All are, 
however, so obviously criminal, if they are judged 
by the spirit of the law, — not to say by the letter of 
it, — that it is better to leave the discussion of the 

2g 



450 ESSENTIALS OF ECONOMIC THEORY 

mode of suppressing them to legal and political 
science. 

A Practical Mode of Insuring an Approach to 
Normal Rates for Transportation. — When compe- 
tition rules, it enlarges the supply of a dear article 
till the price of it is normal, and it increases the 
capital in a profitable business till its earnings be- 
come so. In the case of railroads this does not 
automatically take place, but the result of it all — 
adequate service and normal charges for it — can 
be directly secured by the state. Charges that 
have been made reasonable by competition may 
be left as they are, and those that are dispropor- 
tionately high may be gradually lowered. The 
growth of traffic may be trusted to keep the total 
earnings of the companies' present plants at the 
amount at which they now stand, in spite of these 
reductions of rates; and enlargements of the plants 
may be permitted to earn further sums which will 
attract capital and keep the service abreast of the 
public need. All this will require expert skill of 
a very high order. For the purpose of the present 
work it is enough to say that such a course as this 
is the only one which will insure in transportation 
the results which competition elsewhere yields. 
It will secure both rates and service which the civil 
law calls "reasonable" and economic law calls 
"natural." 



CHAPTER XXV 



ORGANIZATION OF LABOR 



What an economist wishes first to know con- 
cerning the organization of labor is whether it is 
a natural phenomenon which should be welcomed 
and left to itself. Does it help to establish wages 
on the basis of the productivity of labor, and does it 
do it without much reducing that productivity ? We 
shall find that it works both well and ill in these par- 
ticulars and needs close study and careful regulation. 

What laborers themselves ask concerning the 
organization of men of their class is simply what 
power it has to raise their own wages; and we shall 
shortly find that it has a certain power when it does 
not invoke the principle of monopoly and a much 
larger ,power when it does so. We shall find that 
the benefit from mere organization may be extended 
to the great majority of laborers, while that which 
depends on monopoly is confined to relatively few and 
involves an injury to the remainder. 

The Static Standard of Wages of Unorganized 
Labor. — In that static state toward which society 
is always tending, and in which the normal standard 
of wages is completely realized, men are supposed 
to get all that they produce. The law of marginal 
productivity of labor works, as it were, in vacuo, 
and gives an ideally perfect result. Every unit of 
labor receives what a marginal unit produces. 

Actual Pay of Unorganized Labor. — A static 

451 



452 ESSENTIALS OF ECONOMIC THEORY 

assumption excludes enforced idleness on the part 
of able-bodied men. The changes which throw 
such men out of employment are not taking place, 
and there is no reserve of efficient but idle labor. 
In the actual state, which is highly dynamic, such 
a supply of unemployed labor is always at hand, 
and it is neither possible nor normal that it should 
be altogether absent. The well-being of workers 
requires that progress should go on, and it cannot 
do so without causing some temporary displacements 
of laborers. Though no individual were long out 
of employment, — though a particular man were 
in this condition only briefly and during the period 
occupied by a transit from one occupation to an- 
other, — there would always be in the general market 
some unemployed men. If we throw out of account 
those who are idle because of personal disabilities, 
it will remain true that really efficient men can 
nearly always be had, if only a few are at one time 
needed. The presence of even a few men able to 
do good work and not able to get employment is 
often sufficient to make individual bargaining work 
unfairly to the laborer. When the employing of 
one man is in question, the employer has other alter- 
natives, and the man may not have them. The 
employer may much more readily set men bidding 
against each other for a vacant place than any of 
the men can set employers bidding against each 
other for an idle man. This strategic inequality 
between the parties in the wage contract becomes 
greater as the supply of unemployed men becomes 
larger. At some times and places it may force the 
pay of many workmen downward toward a minimum 
set by what the unemployed will consent to take. 



ORGANIZATION OF LABOR 453 

The Effect of Local Organization. — Organization 
means collective bargaining and tends to equalize 
the strategic positions of men and employers. Where 
an entire force of workers must be dealt with at 
a time, the employer has not the alternative ready 
to his hand which he would have if he had only to 
employ a single one. If his employees strike, he 
cannot at once secure another force large and effi- 
cient enough to meet his needs. If his men allow 
their places one by one to be filled, the strike will 
be disastrous to them, indeed, but it will also be 
a misfortune for the employer. His new force will 
be inferior to his old one, first, because many of 
the new men will be personally inferior to the old 
ones, and secondly, because as a body they lack 
effective training and will not work together as 
efficiently as did the old force. He can afford to 
pay for the disciplined workers the amount that 
the new force will produce with two plus marks 
attached — one representing the superior personal 
quality of the former employees and the other rep- 
resenting the value of discipline. In other words, 
he can afford to make two distinct additions to the 
amount that unemployed men are worth to him in 
order to retain his old employees. This is on the 
supposition that it is possible to gather from the 
force of idle men enough to operate a single estab- 
lishment. Without organization and by means of 
individual bargaining, wages are drawn downward 
toward the level set by what idle men will accept, 
which may be less than they will produce after they 
receive employment and will surely be less than 
they will produce after they have developed their 
full efficiency. With organization which is local 



y 



454 ESSENTIALS OF ECONOMIC THEORY 

only, and with collective bargaining that goes only 
to the extent of adjusting the pay of men in one 
establishment, this pay comes nearer to the standard 
set by the productivity of labor than it would if 
bargains were individually made. The employer 
balances in his mind the value of a new and raw 
force and the value of a selected and disciplined 
force, measures the difference between these values, 
and will often pay a rate that is between the two 
amounts and under average conditions is likely to 
approach the larger of them. 

Wages as adjusted by a General Organization of 
Labor in a Subgroup. — Where organization goes 
to the length of uniting all the employees in a partic- 
ular industry or subgroup, the situation is unlike 
the foregoing in an important particular. No quick 
filling of the places which the men may vacate with 
altogether new workers is possible. The employers 
are not so situated that they can compare the old 
force with a new one, measure the difference in 
their values, and govern their conduct accordingly. 
The training of an entirely new force is indeed a 
remote possibility, if the business can wait for it, 
but it can seldom do this; and a strike that runs 
through a subgroup presents to employers the 
alternative of winning the workers by concessions or 
allowing their business to stop. If it stops, it be- 
comes a question of endurance between the em- 
ployer and the employees, in which the employer 
has the advantage so long as the public does not 
interfere. We shall recur to this condition when 
we study the effectiveness of strikes and boycotts 
under various conditions. Under all three of the 
conditions we have just described, the static standard 



ORGANIZATION OF LABOR 455 

of wages — the final productivity of social labor — 
still exists ; and the actual pay of labor tends toward 
it, but differs from it by varying amounts, accord- 
ing as labor is unorganized, locally organized, or 
organized throughout a subgroup. In the first 
case the worker may get materially less than the 
standard amount; in the second case he may get 
something closely approaching it; and in the third 
case, for reasons to which we shall later give atten- 
tion, he may be able to get the full amount and 
somewhat more. A particular employment which 
is strongly organized and which makes the utmost 
use of its organization is often able to carry the pay 
of its employees to a level that is distinctly above 
that set by the productive power of marginal social 
labor. Nevertheless, the amount of this overplus 
which the favored worker gets is limited, and the 
standard fixed by marginal productivity is one on 
which the pay of these workers and of all others 
depends, though it may not coincide with it. 

The Power of a Universal Organization of Labor. 
— In the days when the wages fund theory held 
sway it was believed that organization could not 
materially advance the interests of labor as a whole, 
since it could not add anything to the fund which 
was destined in any case to be divided among the 
laborers. Now that another theory of wages is 
generally held, it is still clear that what organization 
can do for the entire working class is limited. By 
no possibility can it insure a rate of pay that will 
permanently exceed the product of labor, since 
employers would then be interested in reducing 
the number of their workmen and so raising their 
product per capita to the level of their pay. This 



456 ESSENTIALS OF ECONOMIC THEORY 

would result in a large force of idle laborers, whose 
competition would have its depressing effect on 
the labor market. Up to the natural limit set by 
the specific product of labor a universal organiza- 
tion might successfully carry its demands. More- 
over, this result would require no use of force — no 
"slugging" of non-unionists, since there would be 
none to be slugged. The mere fact of a universal 
organization maintaining discipline and preventing 
breaks within its own ranks would suffice for the 
end in view — the maintenance of pay that should 
conform to its natural standard. The supposition 
of a universal organization of labor has at present 
only a theoretical interest. What society has to 
deal with is an organization that includes a small 
minority of workers and is composed of separate 
unions which are endeavoring each to promote the 
interests of the men of its own craft. It is a type 
of organization which, instead of uniting all work- 
ers, makes the sharpest division between those in 
the unions and those outside of them, and creates 
a lesser opposition between the different unions 
themselves. 

Organized Labor and Monopoly. — Actual trade 
unions do not always rely upon mere collective 
bargaining. They sometimes aim to secure a partial 
monopoly of their fields of labor; and as it is impos- 
sible to do this if unemployed men or men from 
other fields of employment are free to enter their 
territory, they must be kept out of it. They can 
only be kept out by some use of force, and coercion 
applied by the workers in a well-paid field to the 
men who seek to enter it during a strike is a part 
of the strategy of trade unions. 



ORGANIZATION OF LABOR 457 

The Ground on which the Use of Force is Justified. 
— Organized laborers claim a right of tenure of 
their positions; they claim to own them much as 
a man, by right of prior occupation, owns a home- 
stead. They claim the same right to repel intruders 
from their field of employment that a man has to 
drive interlopers from his grounds. "Thou shalt 
not take another man's job" is a recognized com- 
mandment on which they claim the right to act. 

The Mode of Justifying the Use of the Force in 
Guarding Vacated Positions. — Coercion is a com- 
prehensive term and does not always involve per- 
sonal assault. What it inflicts on the recalcitrant 
may range all the way from social opprobrium and 
boycotting to literal striking, maiming, or killing. 
In every case it involves some injury and is con- 
trary to the spirit of the law, unless the right of 
tenure can be fully established. If the employer 
has no right to turn ofT his men and take new ones, 
and if the new ones have no right to come at his 
invitation, there is a rude analogy between the 
effort of the non-union men to get the places and 
an effort to get away a man's farm. It is a matter 
of course that the employer may rightfully dis- 
charge men who prove worthless and fail to render 
the service which is contracted for. The question 
is whether he has the right to dismiss them when 
they will render the service only on what seem to 
him exorbitant terms. On this point the verdict 
of his own reason is extremely clear. To offer to 
render the service only on exorbitant terms has 
the same effect as to offer an inferior service on the 
original terms, and the right of tenure which the 
workingmen claim, if it exists at all, is contingent 



458 ESSENTIALS OF ECONOMIC THEORY 

on the rendering of effective service on reasonable 
terms. On the supposition that they have owned 
their places at all they seem to their employer to 
have forfeited them when they have insisted on 
too high wages. On this point, however, the men's 
reason may give an opposite verdict, though it is 
based on the same principle. To them the terms 
they insist on may appear reasonable, and they 
then think that, because they are so, their owner- 
ship of their positions is valid and that other claim- 
ants are usurpers. Both parties in the dispute base 
their contentions on the supposed reasonableness of 
the terms they demand. 

The Necessity for Knowing what Terms are Reason- 
able. — A momentous question both for society and 
for the working people is whether there is any way of 
ascertaining what terms are reasonable and securing 
conformity to them. What we shall find is that it is 
possible to keep in view the natural standard of wages, 
as in an early chapter we have defined it, and that it 
is possible, in the midst of the struggle of massed cap- 
ital with massed labor, to secure a certain degree of 
conformity to this standard. It is possible so to 
shape the system that a wide difference between 
actual pay and standard pay will not exist, and that 
wages will everywhere tend toward their natural 
levels, as they did under that earlier regime before 
either the capital or the labor of a subgroup acted 
collectively. 

The Attitude of the Community toward Striking 
Laborers. — So long as a local community sympathizes 
with the worker's dread of competition and tolerates 
his claim of ownership of his position, it does not 
utterly condemn and repress every use of force in 



ORGANIZATION OF LABOR 459 

asserting his claim. The local public is partly com- 
posed of friends or neighbors of the striking worker 
and is reluctant to interfere with the worker's effort 
to defend what he considers his property — that is, 
his right of employment in a business to which he is 
accustomed. The community sympathizes with his 
fear of the hardship which may result when em- 
ployers freely utilize idle labor as a means of defeating 
strikes. On the other hand, even a local community 
realizes that much toleration of force means anarchy. 
If the violence is not resisted or repressed, the strikers 
acquire a monopoly that is not dependent on the jus- 
tice of their claims. The whole question of reason- 
ableness in the terms demanded is forcibly set aside, 
and the pay that is established becomes, not whatever 
a calm verdict of disinterested persons would approve, 
but what workers by brute force can get. Even a 
local public is unwilling to see the social order com- 
pletely subverted and mob rule substituted, and it 
usually interferes when violence goes to that length; 
but in its unwillingness completely to repress disor- 
der, on the one hand, or to leave it wholly unopposed, 
on the other, a local government pursues a wavering 
policy, now repressing anarchy and again leaving it 
to gather headway. It seldom affords full protec- 
tion to the non-union men who work during a strike. 
Moreover, it is the habit of state governments not to 
interfere with local affairs until the public peace is 
endangered, and therefore not until the coercion of 
free laborers has gone to great lengths. The federal 
government only intervenes in great emergencies. 
Non-union men working during a strike are left largely 
in the hands of the local community, which often 
tolerates enough of violence to give to strikers a meas- 



460 ESSENTIALS OF ECONOMIC THEORY 

ure of monopolistic power. The wavering policy of 
the local community in regard to preserving the peace 
expresses a corresponding mental wavering. The 
public obeys no clear principle of action in this con- 
nection and merely allows some ''slugging" when it 
sympathizes with strikers, but not, as a rule, when it 
does not. We have to see whether this rule has in 
it any germ of a legitimate policy. 

The Sole Mode of Escape. — The sympathy in the 
ease depends, as we have seen, on the off-hand im- 
pression of the people as to the reasonableness of the 
strikers' demands; and for such an impression there 
may or may not be an adequate ground. It is evident 
that no authoritative verdict has in these cases been 
pronounced. The only escape from the intolerable 
situation which is thus created is by testing the equity 
of the laborer's demands and adjudicating his claim 
to a tenure of his position. The possible method of 
doing this we will presently examine. It is clear in 
advance that what is to be done is to determine what 
pay is reasonable. The worker cannot rightfully 
retain the ownership of his job if he does not work 
properly; and he cannot so retain it if he works 
properly and claims exorbitant pay. Fair dealing 
between employer and employed must be attained if 
his tenure is even tacitly recognized. The worker who 
accepts a rate of pay that is pronounced reasonable 
may safely be confirmed in his place and protected 
from any persecution on the part of his employers. 
The worker who refuses a rate which some competent 
authority has pronounced reasonable thereby forfeits 
his right of tenure in a definitive way. His place 
is clearly the property of whoever will take it, and the 
state is bound so completely to preserve order as to 



OEGANIZATION OF LABOR 461 

make a new worker perfectly secure from injury. This 
means that it must do intelHgently and thoroughly 
what a local community weakly tries to do when it 
lets strikers guard their positions if it sympathizes 
with their cause, and represses such attempts when it 
does not. The sympathy needs to be crystallized 
into a clear verdict as to the rightfulness or wrong- 
fulness of the rate of pay demanded, and the local 
toleration of violence in cases where the men's de- 
mands appear just needs to become an open and 
frank assertion of their right to employment on the 
terms demanded: while the tardy repression of the 
violence in cases in which the demands seem unjust 
needs to become a prompt and complete repression 
of it. 

The Preservation of the Mobility of Labor Indispen- 
sable. — Any use of force, anything, however slight, 
that deprives labor of its mobility, destroys the con- 
dition on which the law of wages is predicated. A 
perfectly free flow of labor from point to point in the 
industrial system is essential to a static state, and to 
any approximate conformity of actual wages to the 
static standard in a dynamic state. The plan which 
divides labor into sections and arrays one part of the 
force against another makes realization of natural 
wages impossible. While all differences of pay 
which correspond to differences of productive power 
are normal, those which are based on a monopolizing 
of fields of labor by some and the exclusion of others 
are abnormal. They cause the rich fields to be sur- 
rounded by impassable walls and force the bulk of 
the population to work on the outer and poorer 
areas. 

The Wide Range of Difference between the Pay of 



462 ESSENTIALS OF ECONOMIC THEORY 

Different Classes of Laborers under Trade Unions. — 
The possible range of the rise of pay which monopoly 
may insure for certain laborers is far greater than 
that which any action can secure for labor as a whole. 
Mere collective bargaining makes some difference, 
indeed, but where there is no attempt to exclude 
from a favored field workers of the poorly paid class, 
the range of difference is not great. To double the 
pay of laborers of every class would require more than 
the entire income of society, and yet it is possible for a 
few workers to make as large a gain as this. Some 
organizations without monopoly may keep the actual 
pay of labor somewhat near to its theoretical stand- 
ard. With monopoly they may carry it far above 
the standard set by the marginal productivity of 
social labor. 

The Differing Efficiency of Organization as used 
against Different Classes of Employers. — When em- 
ployers are acting independently, a trade union which 
deals with them one at a time may very easily bring 
the pay of its members up to a certain average stand- 
ard. A strike against a single producer may be very 
disastrous for him, since it may cause him to lose his 
customers. If the general state of business is good, 
he will pay all that he can rather than see business 
drift away from him, but what he can pay is some- 
what strictly limited. He cannot safely give more 
than what is given by most of his competitors. Or- 
ganization in such a case is a good equalizer of pay, 
and as its power is used against different employers 
successively, it suffices to raise general pay toward 
or to a standard set by the productivity of the labor. 
Moreover, as a rule, it can accomplish this without 
any appeal to violence. A modest and reasonable 



ORGANIZATION OF LABOR 463 

demand enforced by a wholly peaceable strike is 
likely to be conceded. 

The Power of a Strike against All Entrepreneurs 
in a Subgroup. — A strike against employers in an 
entire subgroup may gain more for the workmen, 
but the more ambitious effort encounters stronger 
resistance. The employers, we assume, are compet- 
ing still and have not the power which a monopoly 
would give them to raise the prices of their products. 
Nevertheless, they can concede somewhat more when 
they act together than one of them could concede 
separately. A concurrent raising of prices is entirely 
possible without any positive combination of the pro- 
ducers who follow such a course. Moreover, the strike 
itself, if it continues for any length of time, creates a 
scarcity of the products and a rise of prices. Though 
the employers in the end may concede what their 
workers demand, or some part of it, the settlement 
may not cost them anything, since the advance in 
prices may enable them to take all that they give their 
men out of the pockets of the public. The strike 
by a trade union against competing employers has 
as one ground of early success the employers' dis- 
trust of each other. The danger is that as soon as 
prices become at all firm, one or another of the 
employers may quickly make terms with his men in 
order to seize the opportunity for new business. For 
this very reason, however, the range of possible gains 
from a strike running through a whole subgroup is 
smaller than it would be if the employers were or- 
ganized, so that all of them could safely wait for a 
larger rise of prices before making terms with their 
men. The possible increase of pay without a com- 
bination on the employers' side is distinctly larger 



464 ESSENTIALS OF ECONOMIC THEORY 

than any which a strike against a single employer can 
usually secure. 

The Power of a Strike against a Union of Em- 
ployers. — Still keeping the supposition that there is 
no coercion invoked and that strikes are quite orderly, 
we find that they may gain more when employers are 
consolidated than when they are not so, but that they 
are likely to encounter still greater resistance. The 
demand — " Pay us more and charge it to the public " 
— may be conceded, and probably will be so if the 
employers dread the hostility of their own men and 
the action of the state in enforcing a resumption of 
business. If they have no such dread, their power 
to resist a strike is much greater by reason of consoli- 
dation. They can safely hold out long if the public 
will let them do it. No one of them is in any danger 
of seeing others take his customers. Their hold upon 
their constituency is secure, and their power to tax 
the constituency and make it pay for whatever a strike 
may cost is very great. A strike under such circum- 
stances may win much for the men or it may win 
nothing whatever, and the difference between these 
results is mainly determined by the attitude of the 
people. If the government will hold its hands and let 
the producers work their will, they may (1) allow the 
strike to run for a time, concede something to their 
men, and raise prices enough to recoup themselves 
with a surplus ; or else (2) they may let the strike run 
longer, till the men are tired out, take them back 
without concessions, and still put the same tax on the 
public as in the other case. 

Effectiveness of Coercion as used against Non-union 
Men. — As a peaceful strike has different possibilities 
according as it is used against a single producer, a body 



ORGANIZATION OP LABOR 465 

of competing producers, or a consolidation of pro- 
ducers, so coercion employed against independent 
workers has correspondingly different effects in the 
three cases. When it is used in the case of a strike of 
the first class, it enables the men to carry their point 
more quickly, but does not materially increase the 
amount they can gain. If the independent producer 
is unable to run his mill till he makes terms with his 
original workers, he will be in greater haste to make 
terms, but the amount he can yield is limited almost 
as closely as before by the prevailing rate of pay. 

In the case of a strike of the second class which 
runs through a subgroup in which producers are still 
without union, coercion adds greatly to what the men 
may gain. It may fix and enforce a rate of pay 
which all employers must give, and circumstances will 
compel them to charge it to the public in whole or in 
part. The marginal producers who have no net profits 
must charge the whole advance to the public or go 
out of business, and the result may be that some of 
them may go out. The advance in the rate of pay 
conceded by others may come partly out of their own 
profits and partly out of consumers' pockets. 

With employers in a great consolidation the possible 
advance of wages is at its maximum. The employers 
are in a position to charge to the public all that they 
give to the men, and more. If the state allows them 
to do it, they may thrive by repeated strikes. Whether 
their men thrive or not depends on their power to bar 
other labor from their field and to live without work 
long enough to induce their employers to yield. 

The effect of coercion on the wages of non-union 
laborers means a lowering of their pay. It confines 
them to the less productive field which is open to them. 

2h 



466 ESSENTIALS OF ECONOMIC THEORY 



Wages of union labor which monopolizes its field and deals with 
competing employers. 

Wages obtainable by union 
^^^^^^^^^^^^^^^^^^^^^^ without monopoly ap- 

proximating the natu- 
ral rate. 

Level of pay with no unions 
in the field. 

Wages of non-union labor 
— ^— ^^^^^^^^^^^-^-^ excluded from the more 

productive fields. 

^^^^^^^^^^^^^^^^^^^^^^ Base from which wages are 

measured. 



The height of Hnes 1, 2, 3, and 4, above the base 
line 5, measures wages, and the length of the lines 
rudely indicates the numbers of workmen in differ- 
ent classes. The dotted lines above and below line 1 
represent what union labor which maintains by force 
a monopoly of its field may be able to get from em- 
ployers who are in a combination. It may be more 
than competing employers would give or it may be 
less. 

For men in strong unions who have carte hlanche 
to defend their fields, the policy of leaving other labor 
to its fate is overwhelmingly the more profitable. 
With a choice between gaining a hundred per cent in 
wages for ourselves or ten per cent for working hu- 
manity, self-interest speaks decisively in favor of the 
former alternative. 

In connection with the actual dealings of workmen 
with their employers the following are the principal 
facts : — 

1. When labor makes its bargain with employers 
without organization on its own side, the parties 
in the transaction are not on equal terms and wages 
are unduly depressed. The individual laborer offers 



ORGANIZATION OF LABOR 467 

what he is forced to sell, and the employer is not 
forced to buy. Delay may mean privation for the 
one party and no great inconvenience or loss for the 
other. If there are within reach a body of neces- 
sitous men out of employment and available for filling 
the positions for which individual laborers are apply- 
ing, the applicants are at a fatal disadvantage. 

2. Collective bargaining is a partial remedy for this 
disability and brings the pay of labor closer to its 
normal standard than, under individual bargaining, it 
could possibly be, but does not, of itself, enable one 
class of laborers to raise themselves to a position which 
is very much above that of a majority of the others. 
It gives to no class of workers any monopoly of their 
field or any power to tax the public or oppress men 
who are unorganized. It is a normal and demo- 
cratic measure. 

3. Many actual trade unions do not depend upon 
mere collective bargaining, but aim to secure a special 
gain through a partial monopoly of their several 
fields of labor. Their policy is exclusive in that it 
tries to limit the number of men who are admitted 
to the unions and to prevent non-union men from 
working at the craft. 

4. In the establishing of such control of fields of 
labor some force is employed in order to bar from the 
fields men who would gladly enter them. " Slugging " 
is a frequent part of the strategy used when strikes are 
pending, and this elastic term covers a wide range 
of deterrent arguments. Whatever goes beyond a 
verbal demand or insult to the man or his family and 
involves any use of physical force is included in the 
meaning of the term, and the action ranges from 
small injuries to the clubbings which maim and kill. 



468 ESSENTIALS OF ECONOMIC THEORY 

Moreover, social ostracism is to be rated as tanta- 
mount to force as a means of preventing a free move- 
ment of labor. 

5. When the resort to force is defended, it is on the 
ground that the organized laborers have a right of 
tenure of their positions and that they may vacate 
them and still hold them as quasi-property. One 
man should not ''take another man's job " even after 
the other man has left it. Acting on this claim, union 
laborers treat men who attempt to occupy the va- 
cated places much as a man would treat intruders 
on his land or in his house. It is, as is claimed, a case 
in which a man must be his own policeman and protect 
his property. 

6. The public sympathizes with the worker's dread 
of the competition which he encounters when unem- 
ployed men are gathered from near and far and set 
working in strikers' positions. It even tolerates, in 
a way, his claim of quasi-ownership of his position, and 
though it condemns the violence with which he en- 
forces the claim, it does not summarily repress the 
violence. It is without a well-defined policy and 
often weakly permits disorders to grow into anarchy 
which only troops can quell. Local governments are 
often reluctant to lay vigorous hands on "sluggers," 
even when to do so would forestall the necessity for 
severer measures. This is due to an instinctive 
feeling that hardship and injustice may result from 
allowing employers to utilize a reserve of idle labor 
as a means of depressing their employees' wages and 
defeating strikes. 

7. It is realized, on the other hand, that giving to 
violence a free rein means an amount of anarchy 
which no state can tolerate, that non-union laborers 



ORGANIZATION OF LABOR 469 

have, under the law, a claim to protection, and that 
allowing strikers to drive them from the field is per- 
mitting a monopoly to be established by crime. 
. 8. The reluctance promptly to repress violence, on 
the one hand, or to leave it unopposed, on the other, 
expresses a mental wavering, since the state perceives 
and follows no clear principle in this connection. It 
has neither defined the nature and extent of laborers' 
rights nor provided for any orderly process for secur- 
ing them. 

9. The only escape from this situation is by ar- 
bitration. It is necessary to adjudicate the laborer's 
demand for wages and to legalize his tenure of place 
on condition that he shall accept a just rate of pay. 
The state is bound to ascertain and declare what rate 
is just, to confirm the workers in their positions when 
they accept it, and to cause them to forfeit their 
right of tenure if they refuse it. If the workers thus 
forfeit their claim, their positions are clearly open to 
whoever will take them, and the state is bound to 
protect the men who do this. Such appears to be 
the present situation, and an essential feature of it is 
the need of ascertaining on what principle a court of 
arbitration should proceed in determining what rate 
of pay is just. 



CHAPTER XXVI 

THE BASIS OF WAGES AS FIXED BY ARBITRATION 

The state needs an authoritative mode of determin- 
ing what rate of pay is "reasonable." This duty is 
often imposed on boards of arbitration, for whose guid- 
ance no definite principle of justice has as yet been 
prescribed. Such a board has to depend on its own 
intuitions. It approaches its difficult work, having no 
legal rule for reaching a decision, and yet compelled, 
if possible, to reach one which will actually settle the 
dispute referred to it and enable production to go on. 
It must try, in the verdict it pronounces, to satisfy 
its own sense of equity. What such a tribunal has, 
in most cases, actually done has been to make com- 
promises, and this has measurably accomplished both 
of these ends. A verdict that "splits the difference" 
between the men's demand and their employers' 
is most likely to cause work to be resumed; and on 
the ground that each party is probably claiming too 
much, and that justice lies between the claims, it in- 
sures a rude approach to fairness. This action has 
caused unfavorable criticism of the whole system of 
arbitration, on the ground that it abandons the effort 
to reach absolute justice and tries chiefly to end the 
quarrel on any terms, and also that by giving strikers 
a part of what they demand, it encourages them to 
strike again and secure more. We have to see 
whether a court can do better than this and whether 

470 



WAGES AS FIXED BY ARBITRATION 471 

such a crude procedure has tended at all toward 
putting wages on a normal basis. 

Why a Court cannot reduce Wages in Favored Fields 
to the Rate prevailing at the Margin of Employment. ■ — 
A tribunal of arbitration, which has to deal with con- 
solidated capital and organized labor, acts in a field 
where both profits and wages are higher than they are 
in most departments of industry. Should a court 
then take as its standard of just wages what unor- 
ganized labor gets when it works for independent em- 
ployers? That would usually level the pay of the 
class of laborers it is dealing with to the standard set 
by a much more poorly paid class. 

Should the court, on the other hand, take as the 
just rate the one that generally prevails where em- 
ployers are organized in trusts and workmen in exclu- 
sive unions ? That would be legalizing the result of 
monopoly. The court, in such a case, knows that the 
profits of the business are increased by the employers' 
monopoly and wages by the workmen's; and yet it 
will not pull down the rate of pay to the level prevail- 
ing where no combinations exist. On the other 
hand, to legalize any high rate of wages, which is made 
possible only by a double monopoly, would seem to 
be equally unjust. 

The Power of Monopolistic Trade Unions under 
Different Conditions. — Arbitrators have to deal with 
trade unions which appeal to some kind of force 
in defending their right of possession of a field of 
labor. They make their own demands, strike, and 
compel rivals to stay out of the positions they vacate. 
When this policy is tolerated, they secure an excep- 
tionally high rate of pay. 

We may represent the product of labor and its pay 



472 



ESSENTIALS OF ECONOMIC THEORY 



in the different occupations by the accompanying 
diagram. 

The heavy hue AA' represents, by its height at 
different points above the base Hne EE', the product 
that is specifically imputable to labor in different em- 




ployments. The part of the figure where the line is 
far above EE^ represents the condition where, on the 
employers' side, monopolies are established; while 
on the right of the figure, where the line has descended 
and is slowly approaching the base, the condition is 
represented in which employers are competing with 
each other, and many of them are selling their prod- 
ucts at prices that only cover the cost of creating 
them. A unit of labor working for a monopoly cre- 
ates as large a physical product as it does elsewhere. 
It turns out as many tons of steel or cases of cloth, 
etc., as though no monopoly existed, and the price of 
the goods is high because less labor is employed than 
would be employed under competition and fewer goods 
are produced. The actual product of the unit of 
labor, as measured in dollars, is enhanced by the em- 
ployers' monopoly. BB' represents, by its varying 
distance above EE', what organized labor can get 
under the different conditions. On the left it forces 
the trusts to share gains with it, and gets a high rate 
of pay ; while on the right, where employers are not 



WAGES AS FIXED BY ARBITRATION 473 

in combination and there are no such great gains to 
draw on, it gets less, although at the extreme right it 
gets all that it produces. DD' represents what unor- 
ganized labor can get under the different conditions, 
and it is usually somewhat more where trusts employ 
it than it is elsewhere. The dotted line CC represents 
the product of labor as it would be if it were equalized 
in the different fields. 

The Parties interested in a Dispute in which Both 
Labor and Capital are Organized. — We can best deal 
with the problem of the adjustment of wages by arbi- 
tration if we approach it in a region where organization 
is strong, both on the side of labor and on that of 
capital, and disturbances of the natural system are 
greatest. The struggle that here goes on is, in a way, 
triangular. Organized labor contends against its 
own employers, on the one hand, and against unor- 
ganized labor, on the other; and the part which de- 
velops the greatest bitterness of feeling and the most 
violence is the strife between labor and labor — be- 
tween the trade unionists who strike and the men 
who attempt to occupy their positions. The union 
is more tolerant of the employer's action in driving 
a hard bargain than it is of the "scab's" action in 
"taking another man's job." 

The Public a Fourth Party in the Case. — The three 
parties just named — employers, organized employees, 
and applicants for places — are not the only parties 
whom the dispute affects. The public has a vital 
relation to it, and in a true sense its interest and rights 
are supreme. The public has a right to demand that 
production should not be interrupted, and that the 
supply of necessary articles should not be cut off; 
and it is in line with this demand that arbitrators 



474 ESSENTIALS OF ECONOMIC THEORY 

seek first for an award that the contending parties 
will be willing to accept. 

Two Issues needing Settlement. — In the immediate 
contest over the adjustment of pay, the three parties 
first named are the ones primarily involved. In 
discharging its duty as the preserver of justice, the 
court finds two issues which need to be settled rightly. 
The dispute between entrepreneurs and workmen 
must be rightly adjusted, and the issue between the 
workmen and other labor must be so. The power 
of the state cannot properly be used (1) to force from 
employers more than they can afford to give, or 
(2) to exclude from - any field of employment free 
laborers who are able and willing to do the required 
work. Arbitrators make their awards with an eye 
to conditions within the business and to the state of 
the labor market. Instinctively an arbitrator, in 
trying to satisfy his sense of justice, thinks first of 
the amount that the business yields. The men must 
not take the whole income from the business, leaving 
to the entrepreneur nothing wherewith to meet the 
claim for interest. Without doing this, however, 
they may ask for much more than other laborers will 
accept, and the question arises whether this should 
be conceded to them. In merely putting the relation 
of workmen to employers on a proper footing, the 
tribunal may leave the relation of the strikers to other 
workmen as unsatisfactory as it has been. It appears 
that the tribunal of arbitration cannot by one act 
settle the two issues that are presented to it. If it 
gives to the men what seems like a fair share of the 
product of the business which employs them, it gives 
more than most workers get and more than the law 
of final productivity of labor would afford. Yet 



WAGES AS FIXED BY ARBITRATION 475 

without a ruthless cutting down of the pay of favored 
laborers it cannot apply the standard of final social 
productivity of labor. If it applies this standard 
and cuts down the men's actual pay, they will refuse 
to abide by the decision; and if it tries to obtain a 
power of compulsion and make the men accept its 
decisions, they will try — probably successfully — 
to defeat the attempt. A system of compulsory 
arbitration that should go to the length of forcibly 
equalizing the wages paid to men of like ability in 
different occupations, would not be tolerated in a 
democratic community. 

The Difficulty of Applying the Test of Final Produc- 
tivity. — The law of final productivity works most 
efficiently when it works automatically, as it does 
when competing employers make the best bargains 
they can with locally organized laborers. The results, 
then, approach the theoretical standard, though they 
do not entirely coincide with it. The law, however, 
cannot be rigorously applied by a tribunal which is 
fixing a rate of pay by its own conscious act. How 
can the judges directly ascertain how much a final 
increment of social labor produces? 

Employers, indeed, do make such tests. An esti- 
mate of how much a few additional laborers would 
add to the product of a business often has, in some 
way, to be made, and employers manage to make it; 
but subsequent experience is necessary for verifying 
their judgment. A rule of pay, governed by marginal 
productivity, results from the action spontaneously 
taken by a myriad of employers, who enlarge their 
working forces when they find that they gain thereby, 
and reduce them when they lose. Of course no 
court could do anything of this kind. No depart- 



476 ESSENTIALS OF ECONOMIC THEORY 

ment of industry will turn itself into a laboratory for 
testing the productive power of labor. It is clear 
that the procedure must be much simpler and cruder ; 
and a vital question is whether a board of arbitration, 
proceeding as it must do, is under any influence that 
impels it to render decisions which, in any degree, 
conform to the theoretical standard of pay. Does the 
economic law of wages operate at all when civil law 
steps in to the extent of creating any tribunal of ar- 
bitration ? We shall see. 

The Necessity for Some Standard on which Arbitra- 
tors may base Awards. — When a board of arbitration 
tries to do anything more than to end a quarrel, it 
must seek for some principle of justice. If it is dealing 
with a favored class of laborers, it finds two extreme 
limits between which its awards must fall, namely 
(1) the product which the business yields in excess of 
simple interest on the capital, and (2) the wages that 
unorganized laborers may offer to accept. It is pos- 
sible that the workmen may demand the former 
amount and the employers may offer the latter; and 
if so, compromising is a rule-of-thumb mode of doing 
justice. In the case of a strong union and a highly 
profitable business the employers may offer more 
than the minimum amount, and the award that is a 
compromise between the terms of the contending 
parties will then be well above that which is a fair 
mean between the possible extremes ; yet it does not 
appear that it really conforms to any ethical prin- 
ciple. 

Average Wages as a Standard. — Another possible 
basis of an award is the average rate of wages prevail- 
ing; but it has no claim as a standard of exact jus- 
tice and is very far from being workable. Wages vary 



WAGES AS FIXED BY ARBITRATION 477 

from a very high rate to a very low one; and the high- 
est rate is that which prevails where a trade union 
which is strong enough to keep men out of its field of 
employment deals with a trust which is strong enough 
to keep rival producers out of its field of business. 
Under such conditions shall a court average this rate 
and a very low one, and reason that a mean thus 
arrived at is a legitimate standard of pay or one that 
would be realized if no monopolies existed? There 
is no evidence that this is the accurate fact, and there 
is every evidence that a verdict attained in this way 
would be rejected. It would cut down the pay that 
the favored workers have been getting, not to men- 
tion denying them the increase they are striking for. 
On the other hand, the lowest rates prevail where no 
permanent organizations exist ; and if a strike should 
arise here, should the tribunal take an average rate of 
pay as its standard? That would greatly increase 
the rate that prevails in the region where it is acting, 
and would give the men more than most of their 
employers could afford. It would discard the neces- 
sary rule of keeping within the limit of what an indus- 
try can pay without seeing many of its shops and mills 
closed. Yet a court which refused to raise the pay of 
the lowest class at all would seem to accept the bad 
results of monopoly; for it would ratify the hard 
arrangements which workers who are excluded from 
the better fields are forced to accept. 

A Court of Arbitration not the Agency for Rectifying 
General Evils due to Monopoly. — It will be seen that 
the difficulty we discover in the way of a wholly satis- 
factory action by the court is caused by a tacit de- 
mand that it shall undo the results of monopoly itself. 
We instinctively say to ourselves that the court must 



478 ESSENTIALS OF ECONOMIC THEORY 

insist on doing ultimate justice, and that all rates 
perverted by monopoly are unjust. The arbitrators 
should pull down the high rates, raise the low ones, 
and create such an approach to uniformity as would be 
realized if labor were as perfectly mobile as a static 
assumption requires. To do this would give some 
laborers much less than their employers can afford to 
pay and less than they often do pay ; while it would be 
giving to others more than their employers can pay 
without bankrupting themselves. If such levelling 
is to be done, it must be done by some other agency 
than a board of arbitration. 

The Attitude of the Public toward a Strike hy Em- 
ployees of a Monopoly. — If we turn from a formal 
tribunal to the court of public opinion, we find a like 
state of affairs. There is no danger whatever that 
the public will justify cutting down the wages now re- 
ceived by men in the employment of a monopoly to 
a much lower level. That in itself would not right 
the wrongs of the poorly paid workers or those of the 
public itself. The employer would go on getting high 
prices for his products and would pocket the new 
gain which the reduction of wages gave him. If a 
great corporation is now taxing the public, even those 
who suffer would rather see the proceeds of the grab 
shared with the men than see it all held by the 
employing corporation. It is, indeed, true that if a 
tribunal were to give the men an increased share of 
what the monopoly is getting, the employing company 
would try to recoup itself from the public by raising 
prices still higher; and, if it were to give a reduced 
share, the company might enlarge its business and 
make its prices a shade lower. Giving to the men a 
share of the grab made by their employer does in- 



WAGES AS FIXED BY ARBITEATION 479 

directly cause a certain increase of the injury done to 
others, and withdrawing a share might shghtly lessen 
the injury. The public would rather see the higher 
wages paid, and take some chance of this minor and 
indirect injury, than see the employing company 
pocket all that it exacts from the public. 

Monopoly Prices as affected hy an Increase of Wages. 
— Arbitration often authorizes a rate of pay based on 
the profits of an employers' monopoly ; and yet a tri- 
bunal of this kind must not, and will not, make itself 
the accomplice of any monopoly by making its posi- 
tion more secure. The policy of every public insti- 
tution must, and will, be designed to help make an 
end of every such outlaw that now has a foothold in 
the field of business. Yet any plan which would force 
a monopolistic employer to give to his men an increased 
share of the "grab" which he makes from the pockets 
of consumers tends to increase the amount of the grab 
if the employer is entirely secure in his position. A 
monopoly that is thus safe from interference tries to 
put the price of each of its products at the point where 
the largest net revenue is afforded. If distance 
along the line AG measures the supply of a commodity 
and vertical distance from it measures price, DF 
will be the price curve of a commodity, as it is offered 
in increasing amounts. AD will be the price when one 
unit is offered, and GF will be the price when the full 
amount represented by the line AG is produced. 
The price will then stand at the cost of producing the 
article. When a monopoly is firmly established, it 
will seek to get the largest net profit that can be had, 
and a consistent execution of the plan would reduce 
the output from the amount measured by AG to that 
measured by AH. The price would then become 



480 



ESSENTIALS OF ECONOMIC THEORY 




H'H 



HE and the net profit the amount of the area EB. 
If wages are so raised that the cost becomes G'F', 
the net profit becomes EB'. This profit can be in- 
creased by further reducing the product to the amount 
AH', putting the price at H'E', and the net profit 
E'B', which is larger than EB'. If an independent 
producer can employ non-union labor and create the 

goods at the cost GF, 
and market them with- 
out reducing the price 
much below the level 
indicated by H'E', he 
can make on each unit 
of product a profit 
nearly equal to I'E'. 
This fact makes the 
monopoly cautious 
about raising its price to the level H'E'. A tribunal 
of arbitration may somewhat raise wages without 
fearing such an increase of prices. By a crude and 
instinctive judgment the court will hit upon some 
level of wages which falls well within the limit of what 
the monopoly can pay and is above the amount which 
marginal social labor gets. 

The Probable Result of a Strike as a Standard for an 
Award. — Let us see what would happen if a board of 
arbitration should abandon all effort to level out the 
general inequalities in wages, and try chiefly to end 
quarrels and avert long-continued strikes. With this 
in view it might aim to give the men whatever the)'- 
would be likely to gain by means of the strike. In a 
true sense this mode of procedure is more nearly 
scientific than either of the others. Any tribunal 
of voluntary arbitration will aim to content both par- 



WAGES AS FIXED BY ARBITRATION 481 

ties sufficiently to prevent an interruption of busi- 
ness. The men may consent to take somewhat less 
than they hope to get by a successful strike ; and the 
employers may be willing to pay somewhat more than 
they would at the end of a successful lockout. The 
probable outcome of the struggle may be differently 
estimated by the contending parties, and if so, an act- 
ual struggle will end by making employers pay more 
and the workmen take less than they had severally 
expected to do. If this amount can be awarded at 
the outset and the struggle precluded, all parties 
will be gainers by the continuance of business, unless 
the employers desire a strike for the sake of making 
their products scarce and dear. 

When the Probable Results of a Strike afford an Un- 
fair Standard of Wages. — Where rnonopolies exist and 
trade unions rely on violence in carrying their point, 
it would not be fair to establish a permanent rule of 
wages based on the amounts that strikes so conducted 
secure. Such strikes depend for success on the vio- 
lent exclusion of non-union men ; and actually to give 
permanence to rates so gained would be to fasten on 
the majority of workers the disabilities under which 
they now labor, and to perpetuate the gains of a two- 
fold monopoly. On the other hand, if the court 
should make its award conform to the probable result 
of a strike which should be general in the trade, but 
should not resort to any violence, the procedure would 
be natural and would base itself, in an unconscious 
way, on the true standard of wages. Such a general 
strike, by its' mere magnitude, would preclude the 
possibility of any immediate filling of the vacated 
places by men at the time out of employment; and 
yet the fact that non-union men were not forcibly kept 

2 1 



482 ESSENTIALS OF ECONOMIC THEORY 

out of the trade would be an all-important feature of 
the situation. If, when no strikes were pending, 
men could gain admission to this field, there would be 
no true monopoly on the men's side. The rule of 
giving, by arbitration, what a strike would secure 
would remove the chance of cutting down the rate 
to that which prevails in the more ill-paid employ- 
ments, and would insure to the men the rate that mar- 
ginal workers in actual employment get plus the two 
additional amounts spoken of at the beginning of the 
preceding chapter. The marginal product of labor 
plus an amount for personal superiority plus an 
amount for good organization would be the standard 
to which wages in favored employments would con- 
form; and it is as nearly normal as any practicable 
standard would be. A free application of it would 
reduce the wages of unions that thrive by the use of 
force and would be opposed by such unions. If it 
were adopted, there is a prospect that the awards 
would be rejected by the men until hard experience 
should teach them to relinquish gains secured by vio- 
lence. Yet a tribunal that should adopt this standard 
would allow workmen to retain every advantage that 
organization can afford without a violation of the 
criminal law. Its guide in making awards would be 
the pay which the best unions lawfully get in trades 
akin to the one in whose case they were acting. 

In dealing with a union which is not a true monopoly 
and does not depend on force, arbitrators may safely 
award what an actual strike would probably secure, 
and the simple plan of compromising gives an approxi- 
mation to this amount. What the men will accept 
and the employers will give is about what a strike 
would extort. Where a monopoly of the field of 



WAGES AS FIXED BY ARBITRATION 483 

labor exists and force is used to protect it, a compro- 
mise which anticipates the probable result of a strike 
concedes what could not otherwise be lawfully se- 
cured, and we have to see whether this is a plan 
that a board of arbitration can properly adopt. 

Arbitration as affected by Employers' Monopolies. — 
We confine our attention, for the present, to arbitra- 
tion that has no power of coercion behind it. A board 
may be formed which is compelled by statute to in- 
vestigate quarrels and announce fair terms of settle- 
ment, but the contending parties may be allowed to 
do as they please about accepting the awards. The 
most difficult case with which such a tribunal would 
have to deal is that in which the employer has a 
monopoly of a department of production, and a trade 
union has an exclusive possession of its field of labor. 
The mere removal of the employer's monopoly would 
so greatly simplify the situation as to leave no ground 
for serious difficulty. With that out of the way, — 
with potential competition doing the perfect work 
that under good laws and good policing it ought to do, 
— the pay of laborers in other employments would 
be somewhat higher, and extortionate profits would 
be altogether absent. Profits based on special econ- 
omy would exist, as they should, but those which are 
filched unjustly from any one's pocket would not exist. 
There would be likely to be, in most of the subgroups, 
independent employers efficient enough to hold their 
positions, but without any means of getting abnormal 
gains. These would be marginal employers in their 
several subgroups, and their returns would range 
about that static level at which the wages of labor 
and the interest on capital would absorb them all. 
An award based on what such employers could pay 



484 ESSENTIALS OF ECONOMIC THEORY 

would express what other employers would naturally 
pay, and it would be all that the subgroup as a whole 
could concede without ruining some of its members, 
but it would allow others to make something by special 
economies in production. Productivity profits they 
would get and no others, and these it is in every 
way expedient that they should be allowed to enjoy. 
Suppressing employers' monopolies would remove 
much of the difficulty connected with arbitration, and 
putting an end to violence on the men's part would 
remove almost all the remainder. 

With monopolies in the field it is quite otherwise. 
Their gains are not of the kind that it is for the interest 
of the public to let them keep. The public claims 
these sums on grounds of equity and expediency. 
It is a perverted distribution that gives them to their 
present recipients; and this fact threatens to involve 
more and more the processes of production themselves. 
Centralization, without monopoly, increases the prod- 
uct of industry; but the monopolistic feature that 
often attends it partially paralyzes the producing 
forces, and must be gotten rid of before there can be 
a normal income to divide and a normal way of di- 
viding it. The court of arbitration itself cannot get 
rid of it, and it would do harm if it should try to do so. 
Drastically to cut down wages that have been raised 
by the power of monopoly would injure some workmen 
without materially helping others, and it would bene- 
fit chiefly the monopolistic employers. Such a policy 
would bring the entire system of arbitration to an 
end ; for it is partly a fear that arbitration would not 
leave to favorably situated unions as much as they 
can now get by strikes and boycotts that prevents 
the system from coming into vogue. The state can 



WAGES AS FIXED BY ARBITRATION 485 

end the monopoly, but it must do it by other meas- 
ures than instaUing courts of arbitration. In the 
interim — long or short, as the case may be — 
before these measures will have their effect, it is 
necessary to proceed on a plan of securing by awards 
something like what would result from actual trials 
of strength. The effects of adjudication will not, 
in this interim, be ideal, but it is necessary to accept 
this fact and struggle the harder to obtain conditions 
that will improve them. 

Abnormal Conditions which Arbitrators must Accept. 
— Crude force of one sort or another would sometimes 
give to organized labor twice or thrice as much as free 
labor can earn at the social margin of production, 
and the public approaches the problem of adjustment 
while this condition exists. It may be that a trust 
has crushed competition, made large gains for itself, 
and made it possible to pay employees at a high rate ; 
while, on the other hand, a trade union has made itself 
strong, put pressure on the employers, excluded free 
laborers, and secured a share of the monopolistic 
spoils. Arbitrators, then, whenever a strike is pend- 
ing, may divide the spoils as a strike would do, be- 
tween masters and men. This will leave a few workers 
in possession of a rich field and many hungry ones 
outside of it; and we have asserted that the board 
should confirm the workmen's tenure of place on the 
sole condition that they accept a rate of pay which it 
shall authorize. In this case the arbitrators authorize 
a high rate, while needy men stand ready to take a 
lower one. They confirm wages based on the profits 
of monopoly, but look to the state as the power which 
will get them out of their anomalous position, by 
making an end of monopoly. 



486 ESSENTIALS OF ECONOMIC THEORY 

Why Sharing a "Grab" already made is not an 
Aggravation of the Evil. — While plunder is to be had, 
it is at least by one point fairer that workers should 
have a share of it than that employers should have it 
all. We have said that the court of arbitration finds 
two issues needing settlement, namely, the relation 
of employers and employed within the business, and 
that of laborers outside of this department of industry 
to those within it. Only one of these issues is it ca- 
pable of settling, and it is by a true instinct and not 
merely from expediency that arbitrators permit 
workmen to share in some degree the gains of the 
monopoly that employs them. This is legitimate, 
however, only on the condition that, by further 
measures, the gains of monopoly be reduced. 

How Arbitration will he facilitated by the Suppres- 
sion of Monopolies. — In studying monopolies we dis- 
covered that the prices of their goods do not entirely 
part company with their natural standards, even when 
governments do not at all interfere with them. Po- 
tential competition keeps these prices from rising 
above the standard of cost by more than a certain 
margin. We shall see that if governments do nothing 
in the way of controlling the contests over wages, the 
rates that these yield will not be wholly unnatural. 
They will be held within a certain distance from the 
standards. If too high wages are exacted, the barriers 
will be broken down and competing laborers will 
come into the favored fields. The potential compe- 
tition of idle men hangs as a menace over the heads 
of the too exacting trade unionists, and enforces a 
measure of prudence in the wages demanded. If the 
unions ask too much and strike in order to get it, the 
competition which is now latent will become active, 



WAGES AS FIXED BY ARBITRATION 487 

other men will take the vacated places, and the 
struggle of force will begin. Slugging may ensue and 
may go to the limit of a weak government's tolera- 
tion. The more complete is the exclusion of free 
labor, the higher is the rate which organized labor 
secures; but this rate always falls within a certain 
distance of the normal one, as that is fixed by the final 
productivity of social labor. Even the pay secured 
by violent strikes is, as we have already shown, 
governed by the law of final productivity, though it 
does not coincide with that rate. Actual pay and 
standard pay are like a vessel and a tug attached to 
each other by a hawser, which allows one to drift 
far from the other but does not let them part company. 
In the long run the tug takes the tow with it. Even 
the wages which a trust gives to a fighting union — 
wages paid by a monopoly to a monopoly — are gov- 
erned by the law of final productivit}^, since there is 
a limit on what the trust can extort from the public, 
and there is a limit on what the union can extort from 
the trust. Potential competition, by limiting both 
the producing corporation and the trade union, vin- 
dicates the natural law of wages, though its results 
are made inexact by monopoly. 

How Potential Competition affects Organized Labor, 
— We have seen that potential competition keeps 
within limits the prices of goods made by trusts. If 
they become too high, new mills are built. In a like 
way potential competition puts a check on the wages 
a strong union can secure; for if these are too far 
above the level of non-union men's pay, such men will 
find their way into the business. Open shops will be 
established, either by the present employers or by 
new ones. There will be much to be gained by an 



488 ESSENTIALS OF ECONOMIC THEORY 

independent shop manned by non-union labor, and 
the danger of this makes a trade union more con- 
servative than it would otherwise be. The chief 
potentiality in the case is that of the new and inde- 
pendent shop, and if the way is open for this to appear, 
the range of difference between the pay of favored 
laborers and that of others is greatly reduced. The 
trade union may be able to carry its point and keep 
free labor from its field, so long as it has only its own 
employers to deal with; but if new employers will 
appear whenever there is an inducement to do so, 
the case is quite otherwise. The new mills make the 
greater gains if they are manned by non-union men. 

With the field open for all producers, the danger 
of free shops with free men will impend always over 
the union that demands too much for its members. 
This is now true even where consolidated companies 
exist, and it would be doubly true if there were 
no such companies. The rivalries which would then 
appear would keep wages, as well as prices, near to 
their natural standards. 

In the absence of monopolies on the part of em- 
ployers, and of "slugging" on the part of workmen, 
arbitrators may accept as standards what the actual 
dealings of employers and employed yield. In most 
cases they will ratify no wrong by doing so. The 
court may act as it now does and announce a rate 
based on a mere compromise or on the probable result 
of a strike. If the men accept the award, let them 
keep their places ; but if not, let the positions be open 
to whoever will take them, and let the state repress 
every form of violence that would interfere with their 
doing so. The sentiment of even a local community 
will sustain such a maintenance of order. 



WAGES AS FIXED BY ARBITRATION 489 

The Case of Trades not affected by the Potential Com- 
petition of Non-union Men with New Employers. — 
Building trades are peculiarly situated in that their 
.products have to be made in the locality where they 
will stay, and no competition from labor living at a 
distance is to be feared. If the local unions can pro- 
tect their field by force, they can establish a high rate 
of pay, even though the employers have no unions. 
Arbitration that merely gives what a strike will 
yield will here deviate greatly from the natural stand- 
ard of wages. 

Labor in mining is somewhat similarly situated, 
and so is labor in transportation. In these, and in 
some other fields, new men do not weaken the posi- 
tion of strikers unless they are brought to the places 
where the strikers have been working; and that ex- 
poses them to assault. It is in the making of portable 
goods for a general market that the new and inde- 
pendent shop manned by non-union laborers is an 
important factor. 

It is easy to answer the question whether, in such 
fields, the board of arbitration should confirm the 
workmen's tenure of place while his pay is sustained 
by force. All slugging is inherently criminal and 
should be always and everywhere repressed. In the 
cases that we first examined, a safe course would be to 
hold it in repression, announce a rate of pay based on 
what a strike would then yield, and trust to other 
measures for destroying monopoly on the capitalist's 
side. The chief danger of violence begins when the 
men reject the award and others take their places, 
and at this point the fact of arbitration will make the 
duty of the state easier though hardly clearer. 

The case of such trades as building and mining 



490 ESSENTIALS OF ECONOMIC THEORY 

differs from the others only in the fact that there is 
not present the check that is elsewhere afforded by the 
danger of new mills, and the pay secured by crude 
force is high. To announce a rate based on the result 
of a strike, if slugging is to he permitted during the 
strike, is to accept, for the moment, what violence will 
secure; and nothing will remove this feature of the 
adjudication but a manful assertion of sovereignty 
by the state and a complete ending of the tolerance 
now accorded to anarchy. By no means, however, 
does this deprive union men of the advantage that 
organization gives them. They may be secured in the 
possession of every advantage which collective bar- 
gaining, without violence, can secure. Great num- 
bers enlisted in a union will give to it a prospect of 
success in enforcing any reasonable demand. Volun- 
tary arbitration, that aims to preclude a strike, will 
have to respect this fact of organization and give the 
men about what a legitimate strike would yield. 
As a rule, this will result in compromises of opposing 
claims, and if violence is not in sight as a resource, 
the compromises will fall near to the natural standard 
of wages. 

Why Conciliation is preferred to Arbitration. — Both 
among organized laborers and corporate employers 
there is a dread of state action for the positive adjust- 
ment of wages. There is a preference for conciliation 
over any kind of arbitration, and there is a preference 
for voluntary arbitration over that which has any 
trace of authority behind it. For tribunals which 
have full coercive power, most employers and strongly 
organized laborers have an insurmountable repug- 
nance. If such tribunals were introduced, it would be 
against their strongest opposition, which is saying that 



WAGES AS FIXED BY ARBITRATION 491 

a measure designed to secure industrial peace would 
have to be put into operation while the parties di- 
rectly interested in it opposed it with might and 
.main. 

The reasons for this attitude are not difficult to dis- 
cover. Conciliation aims solely to secure internal 
peace in a department of industry. To avert strikes 
or reduce their duration is all that it can do and all 
that the parties directly interested wish to have it do. 
From the point of view of employers and employed 
in a highly profitable industry, the averting of strikes 
is enough to aim at, and even the public sometimes 
accepts this easy-going view and thinks that every- 
thing desirable is gained merely by averting strife 
or ending it when it occurs. Uninterrupted produc- 
tion — the saving of the great wastes that strikes 
entail — does, indeed, promote the public welfare. 
When conciliation does this, it indirectly does some- 
thing for the public. The essential thing about con- 
ciliation, then, is that it does not consciously try to 
do anything but to make the two parties in the dispute 
over wages contented enough to go on producing. 
A board which aims only to do this is careful not to 
introduce any one who represents an outside interest. 
The procedure must be kept "within the family." 
As is often said, "those who underetand the busi- 
ness" must settle disputes within it. What is really 
desired is that only those who are interested in the 
business should have anything to say about it, and 
there is a dread of giving representation, either to the 
general public or to independent labor. Moreover, 
when the defects of conciliation are spoken of, what is 
mentioned is the uncertainty as to its working, the 
probability that in many cases it will not bring the 



492 ESSENTIALS OF ECONOMIC THEORY 

disputants to an agreement and cause production to 
go on. There is no dread of the rates of pay that it 
yields. There is practically no dread on any one's 
part of what happens when employers and em- 
ployed are contented because they jointly thrive at 
the expense of the public. Rather than have produc- 
tion stopped, the public is often willing to let a dispute 
be settled on almost any terms, though the result may 
be to let some men thrive at the expense of consumers 
and of other laborers. There is a monopolistic grab 
the sharing of which makes both parties better off 
than are men of their class elsewhere. Singular as it 
may seem, even this attitude of the public is justifiable. 
It is entirely right not only to welcome conciliation 
where it can be made to work, but to try it as often 
as possible before resorting to arbitration. 

Rates resulting from Conciliation not Unlike those 
resulting from Strikes. — The results of collective bar- 
gaining, with conciliation in cases of dispute, come 
within a certain distance of those which would be 
gained by a perfectly natural adjustment of wages. 
All that we have said about the relation of wages 
adjusted by strikes to their natural standards applies 
here ; potential competition generally keeps the actual 
rate within a certain distance of the natural one, 
though a monopoly may make the distance unduly 
great. If potential competition works feebly on the 
employers' side, — if independent producers are slow 
to appear even when the price of a product is very 
high, — there is a large profit in the industry for some 
one ; and if potential competition works feebly on the 
side of labor, — if workmen can safely strike with little 
fear that independent laborers will dare to take their 
places, — the men can secure a fair-sized share of this 



WAGES AS FIXED BY ARBITRATION 493 

profit. A strong trade union working for a strong 
monopoly gets wages that exceed the standard rate 
by the largest obtainable margin ; and yet, as we have 
said, even this excess has limits, and adjusting dis- 
putes by conciliation does not alter those limits. 
The rates agreed upon are still governed by the 
standard rate to the same extent as under the regime 
of strikes. The strike and the lockout become po- 
tential, but they impend as possibilities and do their 
work. The board of conciliation knows that they 
will occur unless their probable results are anticipated 
and forestalled by the decision. The board cannot 
do otherwise, therefore, than to restrict the actual 
strikes. Wages then become the natural rate with a 
plus mark, and may be said to be adjusted in a way 
that at the bottom is natural, though it works under 
vitiating influences. 

Why Voluntary Arbitration does more than Con- 
ciliation. — Voluntary arbitration is an advance over 
mere conciliation in point of effectiveness. It departs 
somewhat from the plan of confining the action to 
the family, since it introduces some other parties as 
arbitrators and thus invites some recognition of out- 
side interests. Nevertheless its actual working in- 
volves little change in principle, and its results do not 
greatly vary from those attained by conciliation. 
When we speak of arbitration as voluntary, what we 
usually mean is that acceptance of the award is in no 
way enforced. Either party may accept it or refuse 
it, but it may be that both parties acting together 
cannot prevent the investigation; and the economic 
law of wages acts best when this is the case. How 
such voluntary arbitration is provided for, — whether 
it is established by free contract between employers 



494 ESSENTIALS OP ECONOMIC THEORY 

and employed, or by statute, — is not in this connec- 
tion of importance. The one thing that is important 
is that no compulsion is appHed to either party to force 
him to accept the award. 

A Moral Compulsion due to Voluntary Arbitration. — 
A certain moral force is, indeed, necessarily behind 
the award of such a tribunal. It informs the pubHc 
what fair-minded men regard as a reasonable adjust- 
ment of the dispute, and forces any one who refuses 
to accept such a decision to go on record as claiming 
more than is presumably just. This tends to alienate 
public sympathy, and to forfeit the aid which sym- 
pathy insures. Moreover, where voluntary arbitra- 
tion is established by a contract between parties, — 
where, for example, masters and men agree that dur- 
ing a term of years disputes that cannot otherwise be 
settled shall be referred to a tribunal constituted in 
some prescribed way, — the decision of the tribunal 
is made by the contract to be especially binding. 

Why Mere Compromises lead to Fair Results. — A 
merely compromising policy, such as the one which 
has often been sharply criticised, involves an approxi- 
mation to what strikes would yield; and this, as we 
have seen, gives results which, in a rude way, are 
controlled by economic law. A fact of the greatest 
importance is that the awards made by boards of ar- 
bitration with merely voluntary power are not com- 
promises between mere demands of the two parties; 
they are between genuine ultimata. When the court 
is called in, the employer has offered a rate of pay and 
stands ready to close his mill if it is not accepted ; 
and the men have offered to take a certain rate and are 
ready to strike if the rate is not given. The essential 
fact in the case is that neither of these rates usually 



WAGES AS FIXED BY ARBITRATION 495 

varies by more than a certain amount from the natural 
level of wages. There is every difference between a 
demand put forward for strategic purposes and a real 
-ultimatum. If workmen knew that a court would 
simply make an even division between their own de- 
mand and their employer's offer, then men who were 
getting two dollars a day might ask for four in the 
hope that the arbitrators might give them three. 
Even if no such expectations were entertained, it is 
certain that both parties would exaggerate their 
claims ; workers would demand more and employers 
offer less than they expected in the end to agree upon. 
When, however, the demands are not made in this 
way for the sake of impressing the tribunal, but are 
known to be genuine ultimata, the case is quite dif- 
ferent. The workers will actually go on a strike if 
their demands are not conceded, and they will cer- 
tainly have to do this if they make their figures ex- 
travagant. The employer will close his mill if his 
offer is not accepted, and he will have to do it if his 
offer is absurdly low. Very much is involved in the 
fact that an actual severing of the relation between 
employers and employed impends over them as a 
possibility. 

The Chief Advantage of Arbitration over Conciliation. 
— We are now in a position to measure the real differ- 
ence between conciliation and voluntary arbitration. 
If a strike comes after nothing has been tried except 
conciliation, there is often nothing to prevent the 
strikers from resorting to all the devices which are 
available for guarding their tenure of place — in other 
words, for keeping " scabs " out of the field. The local 
community is in its usual position of uncertainty as 
to the equities of the case, and is likely to show its 



496 ESSENTIALS OF ECONOMIC THEORY 

usual hesitancy in giving to the new laborers the com- 
plete protection which the laws enjoin. There is the 
customary dread of the effect of letting a strike-break- 
ing force have full sway and the opportunity for dis- 
ciplining the former workmen into submission. The 
chance that the resulting rate of pay may be too low 
to do justice to the laborers remains before the eyes 
of the local community, and has the effect to which 
we have earlier called attention — that of taking 
much of the vigor out of the official arm when violence 
occurs. 

How is it when a tribunal of arbitration has studied 
the case and announced a decision? Though the 
workmen may be as free to strike as ever, such an ac- 
tion would put them at a fatal disadvantage. The 
arbitration has given to the public a basis for a judg- 
ment as to the equities of the dispute. If the tribunal 
is one which commands respect, a refusal to abide 
by its decision puts the men prima facie in the wrong. 
If they strike now, they reject a rate which is authori- 
tatively pronounced just. Even this they have the 
privilege of doing if they so desire; but if they go 
farther and forcibly prevent other men from accepting 
the equitable rate and doing the work, they forfeit their 
right of tenure; and it would be a strangely consti- 
tuted public which, under such circumstances, would 
let them use fists, missiles, or clubs in defending it. 

There may be an agreement between employers and 
employed to submit to impartial arbitration such dis- 
putes as are not otherwise settled ; and when this has 
been actually done and a decision has been reached, 
it is made by the contract to be too binding to be 
lightly disregarded. If it is still disregarded and if 
violence is resorted to, the forfeiture of public sym- 



WAGES AS FIXED BY ARBITRATION 497 

pathy is so complete that there is little clanger that 
violence will be winked at. The action of such a tri- 
bunal may be nearly as effective as that of one which 
has full coercive power. 

Why Compulsory Arbitration is less Certain to give 
a Just Award. — Arbitration by a court that has full 
compulsion behind it does not theoretically need to 
satisfy the contending parties. If it can fine or other- 
wise coerce the party that refuses to accept its man- 
date, and thus insure a forced compliance with its 
orders, it is conceivable that it might announce rates 
of pay entirely at variance with prevailing ones. It 
might announce arbitrary rates or make a bold effort 
to discover and introduce those which should coincide 
with the ultimate natural standards — which would 
mean a relentless reducing of some rates and a raising 
of others. In a democratic country, however, such a 
court would have to satisfy the contestants and the 
public or forfeit its existence, and the only mode of in- 
suring its continuance would be a more conservative 
policy and a respecting of the status quo. It might 
appeal to the probable result of violent contests some- 
what less than a purely voluntary tribunal might do, 
since it might venture to give offense to employers or 
to workmen, and trust to the support of the general 
public ; but in the main it would have to let the exist- 
ing rates of wages continue with no radical change. 
Even though it were able by some statistical test to 
discover the natural rates of wages, it could not be 
bold enough rigorously to apply them without for- 
feiting its existence. Under any system, then, 
whether it be crude contention, conciliation, volun- 
tary arbitration, or compulsory arbitration, the rates 
fixed by the present half-savage process would be 

2k 



498 ESSENTIALS OF ECONOMIC THEORY 

allowed to rule till the process itself should be freed 
from the perversion that monopoly causes. Inequali- 
ties of pay would be tempered in different degrees by 
the various tribunals, but the existing rates in each 
employment would continue to furnish a basis of 
adjustment. 

The Most Available Plan of Arbitration. — Since 
there is little prospect that compulsory arbitration 
will give rates of wages which will differ materially 
from those secured by arbitration of the voluntary 
sort, the latter kind has the preference, so long as it 
is able actually to prevent the strikes and lockouts 
which, at present, are so wasteful and disorganizing. 
To accomplish this, there is available a kind of arbi- 
tration which is voluntary, but has behind it enough 
authority to make actual strikes very rare. By this 
plan the state recognizes for an interim the laborers' 
tenure of place, on condition that they continue work- 
ing during the time occupied by the adjustment. 
If they stop working before a decision is announced, 
they forfeit their tenure of positions. When the 
tribunal announces a decision as to the terms on which 
labor shall go on, the force already working has the 
option of retaining the positions or abandoning them ; 
but if they elect to leave them, it must be with the 
understanding that their departure is definitive and 
their right to tenure surrendered. The state then 
uses its utmost power in protecting men who may 
occupy the vacated places. The mere prospect of this 
outcome will be enough, and the shifting of the force 
will not have actually to be made, since the right of 
tenure is too valuable to be forfeited. The system 
requires that prompt action be had whenever a strike 
or a lockout is impending, but it enforces decisions 



WAGES AS FIXED BY AKBITRATION 499 

only by imposing on workmen who choose to be recal- 
citrant the penalty of forfeiting the right of ownership 
of positions, the claim to which they esteem so highly 
that they are ready literally to fight in defense of it. 

A Mode of Dealing with Rebellious Employers. — 
An employer might refuse to accept the result of an 
arbitration. In view of the strong pressure that 
public opinion would exert after the decision should 
have been rendered, frequent refusals are not probable. 
If, however, the employer should reject an award, 
the logic of the case would require that he lose his 
tenure of place as the men do for a like offense ; and 
the only way to accomplish this is to throw him out of 
his business connections. The tenure which an entre- 
preneur most values consists in his relation to his 
customers; and if the state should see to it that the 
goods he makes could always be had from some other 
source, the entrepreneur would be unlikely to close his 
mills. How the state shall keep the sources of supply 
open will become an important question if it shall 
appear -that producers do defy the public opinion 
and reject the court's awards.^ 

The Practical Working of the Arbitration Proposed. — 
Let us see how such a system of arbitration as is here 
described would work in the case in which, as we have 
supposed, a strong trade union is dealing with a 
monopolistic employer. At the outset all violence on 
the men's side is ruled out. No assaulting, maiming, 

1 If the employer were a corporation possessing a monopoly 
of its department of production, it would be difficult quickly to 
open such new sources of supply as would be requisite; but 
a temporary reduction of import duties would often go far in 
this direction. And a measure which would insure the running 
of the plant under a temporary receivership would, of course, 
do it. 



500 ESSENTIALS OF ECONOMIC THEORY 

or killing of so-called "scabs" is tolerated, and, more- 
over, the first temptation to this is removed by the 
act of the state in recognizing for an interval the men's 
tenure of place. There are no strike breakers to be 
attacked. While proceedings of arbitration are pend- 
ing, the obnoxious class is out of sight, and all the 
places are transiently reserved for their original hold- 
ers. The court has submitted to it two possible rates 
of pay, one demanded by the men and the other offered 
by the employers. It may confirm either of these 
rates or any rate that is intermediate between them, 
and it is likely to pursue the latter course. In any 
case, it announces a rate, the one which to it appears 
to be fair and is more likely to be so than the one 
claimed by either of the parties. " This is a just rate," 
declares the tribunal to the men; "you may take 
it or leave it, but if you leave it a certain thing will 
happen, — workmen who refuse it will forfeit all claim 
upon their positions." Workmen will not often re- 
fuse the award, and the pressure of public opinion 
makes it improbable that the employer will do so. 
Coupled with arbitration and an essential part of the 
system is a policy which shall remove the danger of 
monopoly. In its perfectly secure form monopoly 
as yet scarcely exists, but what does exist is a great 
number of partial monopolies able to handle competi- 
tors roughly and extort profits from the people. Di- 
rectly connected with the adjustment of wages is the 
disarming of such monopolies. The preventing of 
strikes may often be accomplished without this, but 
the insuring of just wages requires it. With a solution 
of the problem of monopoly in view, all other needs of 
the situation might well be met by arbitration with- 
out compulsory power. 



WAGES AS FIXED BY ARBITRATION 501 

We may now tabulate our conclusions. 

1. In the making of the wages contract the indi- 
vidual laborer is at a disadvantage. He has something 
which he must sell and which his employer is not 
obliged to take, since he can reject single men with 
impunity. 

2. A period of idleness may increase this disability 
to any extent. The vender of anything which must 
be sold at once is like a starving man pawning his coat 
— he must take whatever is offered. 

3. Collective bargaining enables men to withhold, 
for a time, something which is of importance to an 
employer. He cannot let them all go with impunity. 

4. A strike is a contest of endurance ; and if it con- 
tinues until the men are exhausted, they are col- 
lectively in the position of the hungry individual seller, 
who is at the buyer's mercy. The wages they then 
take may be far below the natural standard. 

5. If their places are filled at once by men who are 
already thus necessitous, the resulting rate may be 
equally, below the natural standard. 

6. The power of the union often depends on its 
use of force in keeping the needy out of its field. 

7. The rate of pay gained where compulsion is 
freely and successfully practiced is above the normal 
rate. 

8. Conciliation does little in the way of changing the 
results which are realized without it, but it lessens the 
frequency of strikes. 

9. Arbitration by a court, which must make a de- 
cision but cannot enforce it — by a court which con- 
firms the workmen's tenure of place while action is 
pending and declares it forfeited if the men reject 
its decree, — such arbitration would secure a closer 



502 ESSENTIALS OF ECONOMIC THEORY 

conformity to the normal standard of wages than any 
other action. It would establish rates which give 
the workmen the benefit of every legitimate advan- 
tage from collective bargaining. 

10. Arbitration by a court which is compelled to 
act, and can enforce its decision, may deviate in a 
particular case from the rate of pay which strikes 
would yield; but if the deviation is frequent and 
great, it will induce a rebellion against the system of 
compulsory arbitration. The rate under this system 
cannot differ greatly from the result secured with no 
arbitration at all. The chief value of all the foregoing 
modes of settling disputes lies in their prevention of 
costly interruptions of business. They may reduce 
the number of strikes and prevent much waste and 
suffering. 

11. A mode of procedure which aims chiefly to end 
strikes usually depends on making compromises be- 
tween opposing claims. This secures an approach to 
a reasonable adjustment, as between employers and 
employed, but does not affect the differences between 
the wages of different classes of laborers. 

12. In order that any mode of adjusting wages 
may give fair comparative rates, monopolies must be 
repressed; and this can only be accomplished by 
measures which are independent of tribunals of arbi- 
tration. 



CHAPTER XXVII 

BOYCOTTS AND THE LIMITING OF PKODUCTS 

When free from the taint of monopoly, trade unions, 
as has been shown, help rather than hinder the 
natural forces of distribution. Collective bargaining 
is normal, but barring men from a field of employ- 
ment is not so. Connected with this undemocratic 
policy are certain practices which aim to benefit some 
laborers at the cost of others, and thus tend to per- 
vert the distributive process. 

Restrictions on the Number of Members in a Trade 
Union. — If a trade union were altogether a private 
organization, it might properly control the number of 
its own members. Before it is formed all members 
of the craft it represents are, of course, non-union 
workers, and the aim of the founders is to "unionize 
the trade" — that is, to enlist, in the membership of 
the body, as large a proportion as is possible of the 
men already working in the subgroup which the union 
represents. From that time on it can fix its own 
standard of admission, and allow its membership to 
increase slowly or rapidly as its interests may seem 
to dictate. 

How a too Narrow Policy defeats its Own End. — 
Very narrow restrictions, while they keep men out of 
the union, attract them to the trade itself. An ex- 
treme scarcity of union labor and the high pay it 
signifies causes the establishment of new mills or shops 
run altogether by non-union men. If these mills 

503 



504 ESSENTIALS OF ECONOMIC THEORY 

and shops are successful, the union may later admit 
their employees to membership; and a series of suc- 
cessful efforts to produce goods by the aid of unor- 
ganized labor thus interferes with the exclusive policy 
of unions. The number of their members grows in 
spite of efforts to the contrary. 

Free Admission to a Trade Equivalent to Free Ad- 
mission to a Union. — We may recognize as one of the 
principles in the case that free admission to the craft 
itself involves free admission to the union. When 
once men are successfully practicing the trade, the 
union is eager to include them, though it enlarges its 
own membership by the process. 

How a Government might "prevent a Monopoly of 
Labor. — It is entirely possible that a government 
might require trade unions to incorporate themselves, 
and might include in the charter a clause requiring 
the free admission of qualified members, subject only 
to such dues as the reasonable needs of the union might 
require. That is not an immediate probability, but 
the end in view can be attained by making member- 
ship in the trade itself practically free — which means 
protecting from violence the men who practice it 
without joining the union. This is not difficult 
where a mill in an isolated place is run altogether by 
independent labor, and it is natural that the unions 
should endeavor, in other ways than the crudely ille- 
gal ones, to prevent the successful running of such 
mills. If they run with success, their employees 
will have to be attracted into the unions. A measure 
designed to impede the running of non-union mills 
is the boycott. It is a measure which does not in- 
volve force and which is yet of not a little value to 
workers. 



BOYCOTTS AND THE LIMITING OF PRODUCTS 505 

The Nature and Varieties of the Boycott. — A boy- 
cott is a concurrent refusal to use or handle certain 
articles. In its original or negative form, the boycott 
•enjoins upon workers that they shall let certain speci- 
fied articles alone. If they are completed goods, they 
must not buy them for consumption; and if they 
are raw materials, or goods in the making, they must 
not do any work upon them or upon any product into 
which they enter. They may thus boycott the man- 
tels of a dwelling house and refuse to put them in posi- 
tion, or, in case they have been put in position by other 
workmen, they may, as an extreme measure, refuse 
to do further work on the house until they are taken 
out. A producers' boycott, such as this, falls in quite 
a different category from the direct consumers' boy- 
cott, or the refusal to use a completed article. When 
a raw material is put under the ban, workers strike if 
an employer insists on using it. If the cause of the 
boycott is some disagreement between the maker of 
the raw material and his workmen, the measure 
amounts to the threat of a sympathetic strike in aid 
of the aggrieved workers. If the cause is the fact that 
the materials were made in a non-union shop, the men 
who thus made them have no grievance, but the union 
in the trade to which these men belong has one. It 
consists in the mere fact that the non-union men are 
working at the trade at all and that their employer is 
finding a market for their product. Workers in other 
trades are called on to aid this union by a sympathetic 
strike, either threatened or actually put into effect. 
Such a boycott as this may therefore be described as 
amounting to a potential or actual sympathetic strike 
somewhat strategically planned . If the strike actually 
comes, it may assist the men in whose cause it is under- 



506 ESSENTIALS OF ECONOMIC THEORY 

taken ; and the principles which govern such a boycott 
are those which govern strikes of the sympathetic 
kind. 

Direct Consumers^ Boycotts economically Legitimate. 
— The other type of boycott is a concurrent refusal 
to buy and use certain consumers' goods. Legally it 
has been treated as a conspiracy to injure a business, 
but the prohibition has lost its effectiveness, as legal 
requirements generally do when they are not in har- 
mony with economic principles. Of late there has 
been little disposition to enforce the law against boy- 
cotting, and none whatever to enforce the law when 
the boycott carries its point by taking a positive in- 
stead of a negative form. The trade-label movement 
enjoins on men to bestow their patronage altogether 
on employers included within a certain list, and this 
involves withdrawing it from others ; but the terms of 
the actual agreement between the workers involve 
the direct bestowing of a benefit and only inferentially 
the inflicting of an injury. The men do not, in terms, 
conspire to injure a particular person's business, but 
do band themselves together to help certain other 
persons' business. Economic theory has little use for 
this technical distinction. It is favorable rather than 
otherwise to every sort of direct consumers' boycott, 
and is particularly favorable to the trade-label move- 
ment. This movement may powerfully assist workers 
in obtaining normal rates of pay, and it will not help 
them to get much more. 

The Ground of the Legitimacy of the Boycott. — An 
individual has a right to bestow his patronage where 
he pleases, and it is essential to the action of economic 
law that he should freely use this right. The whole 
fabric of economic society, the action of demand and 



BOYCOTTS AND THE LIMITING OF PRODUCTS 507 

supply, the laws of price, wages, etc., rest on this 
basis. Modern conditions require that large bodies 
of individuals should be able concurrently to exercise 
a similar right, — that organized labor should bestow 
its collective patronage where it wishes. This can be 
done, of course, only by controlling individual mem- 
bers, for the trade union does not buy consumers' 
goods collectively. If it can thus control its members, 
it can use in promoting its cause the extensive pat- 
ronage at its disposal. 

Unfavorable Features of the Indirect Boycott. — The 
boycott we have thus far had in view is a direct con- 
fining of union laborers' patronage to union-made 
goods. Why this is a thing to be encouraged we 
shall presently see. What we have said in favor of it 
does not apply to boycotting merchants on all their 
traffic because they deal in certain goods. If a brand 
of soap is proscribed, the workers are justified in con- 
currently refusing to use that variety; but it is not 
equally legitimate to prevent a merchant, whose 
function it is to serve the public, from selling this 
soap to the customers who want it. To refuse to buy 
anjrthing whatsoever from a merchant because he 
keeps in his stock a prohibited article, and sells it to a 
different set of customers, is interfering, in an un- 
warranted way, with the freedom of the merchant 
and of the other customers. Indirect consumers' 
boycotts have little to commend them, but those of 
the direct kind have very much. 

The Merits of the Trade-label Movement. — This 
appears most clearly in connection with the trade- 
label movement. As a result of this movement union 
laborers will, as is hoped, buy only union-made goods. 
The existence of such a movement in itself implies 



508 ESSENTIALS OF ECONOMIC THEORY 

that there are goods of the same sort to be had which 
are not made by union labor. The shop that is run 
by the aid of independent labor is the cause of the 
existence of the union label. If all the labor in a 
group were organized, the label would have no sig- 
nificance. At present the trade unions offer to an 
employer a certain amount of patronage as a return 
for limiting himself to union men, and so long as the 
cost of making his goods is not much increased, the 
inducement may be sufficient to make him do it. 

The Movement as affected by Extravagant Demands 
on Employers. — Unduly high wages mean, of course, 
unduly high prices. Without here taking account of 
the "ca'-canny" policy, which aims to make labor in- 
efficient, extravagant wages for efficient labor increase 
the cost of goods. This opens the way, as we have 
seen, for the free shop and the labor which is willing 
to sell its product at a cheaper rate. If union labor 
then firmly resolves to buy only the goods with the 
label, it proposes a heroic measure of self-taxation. 

Trade Labels and the Quality of Goods. — The ex- 
perience of the trade-label movement thus far has 
been, that in some instances the label vouches for 
prices which are high, if quality be considered, or for 
a quality which is poor if the prices are the current 
ones. In.stead of telling the purchaser that the shoes, 
hats, cigars, etc., which bear the label are surely the 
best that can be had for the money, the labels are 
more apt to tell him that the goods are poorer than 
others which can be had. In some instances this is 
not the case, and the union-made articles are as good 
and as cheap as others. When the label stands for a 
high price or a poor quality, the union fails to con- 
trol its members and especially its members' wives. 



BOYCOTTS AND THE LIMITING OF PRODUCTS 509 

Having the meager pay of a week to invest, the wife 
needs to use it where it will do the most for the family. 
There is so strong an inducement to buy goods which 
are really cheap and good that the trade-label move- 
ment fails whenever loyalty to it means very much of 
self-taxation. 

The Object Lesson of the Consumers' Boycott. — Or- 
ganized labor gives itself a costly and impressive ob- 
ject lesson when it tries to force all men of its class 
to buy the dearer of two similar articles. What this 
shows is that the demands of unions must be limited, 
and that for the highest success they must be so limited 
that there shall be no decisive advantage given to 
an employer who has a non-union shop. A marked 
difference in costs of production will cause the free 
shop to grow and the union shop to shrink. A certain 
moderate difference in wages there may be, provided 
always that the union labor is highly efficient; but 
more than such a difference there cannot safely be. 
If the trade-label movement should be generally 
successful, that fact would prove that the demands 
of trade unions were kept within reasonable limits. 

The Policy of Restricting the Product of Labor. — It 
is a part of the policy of trade unions to limit the inten- 
sity of labor. The term "ca'-canny" means working 
at an easy-going pace, which is one of the methods 
adopted in order to make work for an excessive num- 
ber of men. For some of this the motive is to avoid 
an undue strain on the workers. If the employer 
selects "pacemakers," who have exceptional ability 
and endurance, and tries to bring other laborers to 
their standard, then the rule of the trade union, which 
forbids doing more than a certain amount of work in a 
day, becomes a remedy for a real evil — the excessive 



510 ESSENTIALS OF ECONOMIC THEORY 

nervous wear of too strenuous labor. This, however, 
by no means proves that the policy as carried out is a 
good one. Beyond the relief that comes when undue 
speeding of machinery and driving of workers is re- 
pressed, it will be impossible to prove that in the long 
run there is any good whatsoever in it, and the evil 
in it is obvious and deplorable. 

"Making Work" as related to Technical Progress. — 
The policy reverses the effects of progress. That 
which has caused the return to labor to grow steadily 
larger is labor saving or product multiplying, and labor 
making and product reducing are the antithesis of this. 
Enlarging the product of labor has caused the stand- 
ard of pay to go steadily upward and the actual rate 
to follow it ; and the prospect of a future and perpetual 
rise in the laborers' standard of living depends almost 
entirely on a continuance of this product-multiplying 
process. A single man maintaining himself in isola- 
tion would gain by everything that made his efforts 
fruitful, and society, as a whole, is like such an isolated 
man. It gains by means of every effective tool that 
is devised and by every bit of added efficiency in the 
hands that wield it. 

Reversing the Effect of Progress. — It follows that 
undoing such an improvement and going back to ear- 
lier and less productive methods would reverse the 
effect of the improvement, which is higher pay for 
all ; it is restoring the condition in which the product 
of labor and its pay were lower. The "ca'-canny" 
policy — the arbitrary limiting of what a man is 
allowed to do — has this effect. It aims to secure a 
reduction of output, not by enforcing the use of in- 
ferior tools, but by enforcing the inferior use of the 
customary tools. The eflect, in the long run, is, and 



BOYCOTTS AND THE LIMITING OF PRODUCTS 511 

must be, to take something out of the laborers' 
pockets. 

The Effect of the Work-making Policy under a Regime 
. of Strong Trade Unions. — It is, of course, only a 
strong trade union that can enforce such a policy as 
this. Making one's own work worth but little offers 
a large inducement to an employer to hire some one 
else if he can. Within limits, the powerful union 
may prevent him from doing this, and if for the time 
being society is patient and tolerant of anarchy, — if 
it allows men who are willing to work well in a given 
field to be forcibly excluded from it by men who are 
determined to work ill, — the policy may be carried 
to disastrous lengths. 

How Static Law thwarts the Work-making Policy. — 
Even strong unions, as we have seen, succeed in main- 
taining only a limited difference of pay between their 
trade and others. The effort to maintain an excessive 
premium on labor of any kind defeats itself by induc- 
ing free labor to break over the barrier that is erected 
against it. The same thing happens when we reduce 
the productive power of organized labor. If, at a 
time when the premium that union labor bears above 
the non-union kind is at a maximum, the policy of re- 
stricting products is introduced, it so . increases the 
inducement to depend on an independent working 
force that there is no resisting it. The palisade which 
union labor has built about its field gives way, and other 
labor comes freely in. If the ca'-canny policy makes 
it necessary to pay ten men for doing five men's work, 
the union itself will have to give place to the inde- 
pendent men. No single good word can be said for 
the ultimate effect of the policy as carried beyond the 
moderate limit required by hygiene. Up to' the point 



512 ESSENTIALS OF ECONOMIC THEORY 

at which it will avert undue pressure upon workers, 
stop disastrous driving and the early disabling of 
men, the effect is so good as amply to justify the reduc- 
tion of product and pay which the policy occasions. 
Beyond that there is nothing whatever to be said for it, 
and if it shall become a general and settled policy of 
trade unions, it will be a clog upon progress and mean 
a permanent loss for every class of laborers. 

Notwithstanding all this, it must be true that some 
motive which can appeal to reasonable beings impels 
workers to this policy. No plan of action, as general 
as this, can be sustained unless some one, at least tran- 
siently, gains by it. Workers have a tremendous 
stake in the success of any plan of action they adopt, 
and they have every motive for coming to a right con- 
clusion concerning it. They are in the way of getting 
object lessons from every mistaken policy, as its per- 
nicious effects become apparent, even though some 
local and transient good effects also become evident. 
It is not difficult to see what it has been that has 
appealed to so many laborers and induced them volun- 
tarily to reduce the value of their labor. 

A Common Argument against Product Restricting. — 
What is commonly said of the policy is that it is based 
on the idea that there is a definite amount of work of 
each kind to be done, and that if a man does half as 
much as he could do, twice as many men will be em- 
ployed to do the whole amount. Nobody who thinks 
at all actually believes that the amount of work of a 
given kind is fixed, no matter how much is charged for 
it. If workers on buildings charged from five to ten 
dollars a day, there would be fewer houses erected 
than would be erected if they charged three dollars; 
and the same thing is true everywhere. The amount 



BOYCOTTS AND THE LIMITING OF PRODUCTS 513 

of labor to be done in any field of employment varies 
constantly with changes of cost, and making labor 
more costly in a particular department reduces the 
amount of its product that can be sold. 

A trade union often finds that there are too many 
workers in its field to be constantly employed at the 
rate of pay it establishes. The result is partially 
idle labor ; the men work intermittently, and though 
the high wages they get for a part of their time may 
compensate them for idle days or weeks, the idleness 
which is the effect of the oversupply is inevitable. 

A given number of workers in the group which 
makes A"' when the wages are three dollars a day 
becomes an excessive number when the wages are five, 
and even if the high wages do not attract men from 
without and make the absolute number of workers 
greater than before, employment is not constant. The 
ca'-canny policy is a transient remedy for this. It is 
an effort to avoid the necessity for partial idleness and 
for the transferring of laborers to other occupations. 
All the labor may, for a time, remain in its present 
field if it will afflict itself with a partial paralysis. For 
a while the demand for the product of the labor will be 
sufficient to give more constant employment. Time is 
required for the full effect of the product-limiting policy 
to show itself in a falling off of the consumption of the 
goods whose cost is thus increased. When it comes the 
evil effect of the policy will appear. If a union were 
strong enough to keep a monopoly of its field, in spite 
of the greater efficiency of laborers that are free to 
work in a normal way, it would be strong enough to 
maintain much higher pay for its own members if it 
limited the number of them and encouraged them to 
work efficiently. The strongest conceivable union 

2l 



514 ESSENTIALS OF ECONOMIC THEORY 

must lose by substituting the plan of paralj^zing labor 
for that of restricting the number of laborers. The 
union may choose to take the benefit of its monopo- 
listic power by keeping an unnecessarily large num- 
ber of men in constant employment, rather than by 
getting high wages for efficient work ; but in that case 
any union but one the strength of which is maintained 
in some unnatural way is likely to come to grief by 
the great preference it creates for non-union labor. 
The independent shop will get the better men at the 
lower rate of wages, and its products will occupy the 
market. The popularity of the plan of work making 
is the effect of looking for benefits which are transient 
rather than permanent. If it were carried in many 
trades as far as it already is in some, it would probably 
neutralize, even for those who resort to it, much of the 
benefit of organization, and work still greater injury 
to others.^ 

The Eight-hour Movement as a Work-making Policy. 
— The effort to reduce the hours of labor to eight per 
day has in it so much that is altogether beneficent 
that it is not to be put in the same category with the 
ca^-canny plan of working. And yet one leading argu- 
ment in favor of this reducing of the number of hours 
of work is identical with that by which a reduction of 
the amount accomplished in an hour is defended. The 
purpose is to make work and secure the employment 
of more workers. What has been said of the other 



' It will be seen that whether the policy is successful in giv- 
ing employment to the partially idle or fails to do so depends 
on the amount of reduction in the sale of the goods which the 
increased cost of making them entails; and if the market is 
highly sensitive to increased cost, the policy may fail in secur- 
ing even a transient increase of employment. 



BOYCOTTS AND THE LIMITING OF PRODUCTS 515 

mode of work making applies here. Reducing the 
length of the working day cuts down the product that 
workers create and the amount that they get. In 
the main the loss of product is probably offset by 
the gain in rest and enjoyment; but the loss of prod- 
uct, taken by itself alone, is an evil, and nothing 
can make it otherwise. If the hours were further 
reduced, the loss would be more apparent and the 
gain from rest and leisure would be less. 

One Sound Argument in Favor of the Greater Pro- 
ductivity of the Eight-hour Day. — There is one reason 
why the eight-hour day may in a series of generations 
prove more permanently productive than a longer one. 
It may preserve the laborers' physical vigor and enable 
them to keep their employment to a later period in 
life. The dead line of sixty might be obliterated. 

If what we wanted were to get the utmost we could 
out of a man in a single day, we should do it by mak- 
ing him work for twenty-four hours ; after that, for 
another twenty-four hours, he would be worth very 
little. ' If we expected to make him work for a week, 
we should probably shorten the day to eighteen hours. 
If we expected to employ him for a month and then 
to throw him aside, we might possibly get a maximum 
product by making him work fourteen hours. If we 
wanted him for a year only, possibly a day of twelve 
hours would insure the utmost he could do. In a 
decade he could do more in a ten-hour day, and in a 
working lifetime he could probably do more in eight. 
Forty or fifty years of continuous work would tell 
less on his powers and on the amount and quality of 
his product. 

The Connection between the Restriction of Products 
and the Trade-label Movement. — Very important is 



516 ESSENTIALS OF ECONOMIC THEORY 

the bearing of these facts concerning the restriction 
of laborers' products and the trade-label movement. 
If that movement should become more general and 
effective, it would bring home to all who should take 
part in it the effects of the labor-paralyzing policy. 
The faithful trade unionist would find himself paying 
a full share of the bill which that policy entails on 
the public. Ordinary customers can avoid the prod- 
uct whose cost is enhanced by the trade-union rules ; 
but the unionist must take it and must make himself 
and his class the chief subjects of the tax which en- 
hanced prices impose. It may well be that the per- 
nicious quality of the general work-making policy 
will become so evident in any case that it will be 
abandoned; and this would be made sure by a rule 
that should actually make union labor the chief pur- 
chaser of union goods. Ca'-canny would then mean 
self-taxation on a scale that no arguments could make 
popular. 



CHAPTER XXVIII 

PROTECTION AND MONOPOLY 

The more serious perversions of the economic sys- 
tem which we have encountered have all been trace- 
able to some working of the principle of monopoly, 
and it is important to know whether any established 
policy of governments lends force to this evil influence. 
Import duties were established in America for the pur- 
pose of protecting industries as such, and a vital ques- 
tion now is whether they have now begun to protect 
monopolies within the industries. 

A Supposed Conflict between Theory and Practice. — 
There was a time when theorists and practical men 
seemed to be in hopeless disagreement concerning the 
entire subject of protection. In the view of the prac- 
tical man an economist was a person who, in his study, 
had reached certain conclusions which were equally 
unanswerable in themselves and irreconcilable with 
the facts. The expression most commonly heard in 
this connection was that "theory and practice do not 
agree." The doctrinarians were, in those days, unusu- 
ally harmonious among themselves, for there were 
comparatively few who made a vigorous defense of 
protection on grounds of economic principle. The 
practical world was less harmonious, since the views of 
different parts of it were colored by differing intei*ests ; 
but the fact that science did not fall into self-contra- 
diction was encouraging. It was possible for the un- 
compromising free-trader to think and to say that f un- 

517 



518 ESSENTIALS OF ECONOMIC THEORY 

damental principles were all on his side, and that the 
protectionist had nothing in his favor except transient 
disturbances that interfered with the perfect working 
of the principles. 

Static Theory in Favor of Free Trade. — Now, the 
business world conceded too much to the free-trader 
when it said that he had theory altogether in his 
favor. What he could truthfully claim, and what the 
world could safely admit, was that he had static theory 
in his favor. Static theory deals with a world which 
is free, not only from friction and disturbance, but 
also from those elements of change and progress 
which are the marked features of actual life. Stop 
all the changes that are taking place in the industrial 
life of the world; put an end to inventions and im- 
provements in business organization; let there be 
no moving of population to and fro, and no increase 
of the aggregate population of the world; further, 
let there be no addition to the wealth of the world 
and no change in its forms, — and you will have the 
static state described in the early part of this treatise. 
Men would go on making things to the end of time, 
using identically the same methods that are now in 
vogue and getting identically the same results, and in 
such an imaginary world there would be no possibility 
of answering the contention of the general body of 
economists of a generation ago. Free trade would be 
the only rational policy, and it could be defended upon 
the simple ground on which division of labor in the case 
of individuals is defended. One man has an aptitude 
for making shoes, another for making watches, an- 
other for painting pictures, and so on ; and each one of 
them can gain far more by devoting himself to his 
specialty and bartering off the product of it than he 



PROTECTION AND MONOPOLY 519 

can by trying to make everything for himself. Na- 
tions have their special aptitudes and should follow 
them, and make all they can out of them; and the 
nation which has special facilities for producing cot- 
ton, or wheat, or petroleum, or gold and silver bullion 
should devote itself to its specialties, barter off the 
results, and get all manner of goods in return. 

Wastes from Protection reduced hy the Fact of Di- 
versified Resources. — It is true, indeed, that a great 
nation like our own makes a much better jack-of-all- 
trades than an individual can make. It is far more 
probable that the nation as a whole can produce with- 
out much waste all the things it wants to use than that 
any individual can do so. If we have all climates from 
the tropical to the arctic, all soils, and a full list of 
mineral deposits, why should it pay us to confine 
ourselves to the making of only a few things in order 
to barter them off for others? Why should we not, 
with our wide range of resources, make everything ? 

Undoubtedly we can make almost everything if we 
insist upon doing it ; but there are still some things that 
other countries can make and sell to us on such terms 
that we can do better by buying them than by pro- 
ducing them ourselves. We can raise tea in the 
United States, but it pays us better to make something 
else and barter it off for tea. A day's labor spent in 
raising cotton to send away in exchange gives us more 
tea than a day's labor spent in producing the latter 
article directly. In a static condition we should have 
found in what fields it is most profitable to employ 
our energies. We should be directly making things 
that it would pay us best to make, and we should be 
indirectly making the other things ; that is, we should 
be producing articles to send off in exchange for those 



520 ESSENTIALS OF ECONOMIC THEORY 

other things. Wherever an indirect way of acquiring 
a thing had proved most profitable, we should have 
adopted that method, and we should always adhere 
to it. Anything that forced us to make directly 
something which we could secure in greater abundance 
by bestowing the labor that would make it on making 
something else, would turn our energies in a compara- 
tively unproductive direction. It would inflict on us 
a waste and a loss — and there are such wastes and 
losses inherent in the operation of the principle of pro- 
tection, and there is no contending against the argu- 
ment that demonstrates their existence. Protection 
and a certain distortion of the productive system, 
a certain misdirection of energy, are synonymous. 

The Argument for Protection Dynamic. — Now an 
intelligent argument in favor of protection begins at 
this point. It accepts the whole static argument in 
favor of free trade, and its own assertion begins with a 
"nevertheless." It claims that in spite of what is 
thus conceded, protection is justifiable, since, in the 
end, it will pay, notwithstanding the wastes that 
attend it. The argument for protection is entirely a 
dynamic one. It is based on the fact of progress and 
admits that it could make no case for itself under the 
conditions of a static state. If every country had cer- 
tain special facilities for producing particular things, 
and if its state in this respect were destined to remain 
forever unchanged, it could, to the end of time, make 
itself richer by depending for many things on its 
neighbors than it could by depending for those things 
immediately on itself. The fact is, however, that a 
nation like our own abounds in undeveloped and even 
unknown resources which, when brought to the light, 
may take precedence of many of those which are 



PROTECTION AND MONOPOLY 521 

known and utilized. If our country from end to end 
were like Cape Nome, and as rich in gold as the richest 
part of that remote region, and if it were certain that 
■ the deposits of gold would never be exhausted and would 
employ the whole energy of our people, it is clear that 
we should have one staple occupation and should de- 
pend upon the rest of the world for almost every sort 
of portable commodity. We should be stopped from 
manufacturing by the great productivity of labor in 
placer mining. So long as men could make ten dol- 
lars a day by washing out gold from the sands, there 
would be no use in setting them at work making two 
dollars a day as weavers or shoemakers or what not. 
By buying our cloth with gold dust we could get far 
more of it than we could if we took the men out of the 
mine and set them to m.aking the stuff itself. But — 
and here is the proviso that makes the supposition 
correspond with the fact — if, besides the placers, 
we had deep mines of other metals than gold, if we 
had oil and lumber and loam of every variety, and if 
we had people with undeveloped mechanical aptitudes, 
it might be that we should do well to develop these 
latent energies even in a wasteful way. The condi- 
tion that would fully establish the similarity between 
the supposed case and the actual one is that the placer 
deposits should be, as placers are, sure to be exhausted 
by continued working, and that producing other things 
than gold should tend to become, with time, a more 
and more fruitful process. We can justify the attitude 
of the country that taxes itself at an early date for the 
sake of testing and developing the latent aptitudes 
of its land and its people. At the outset it will thereby 
sustain a loss, because at the outset it can gain more 
goods by the indirect method of exchange than it can 



522 ESSENTIALS OF ECONOMIC THEORY 

by production; but there may easily come a time 
when it can gain more by the direct method. If we 
learn to make things more economically than we could 
originally make them, if we hit upon cheap sources of 
motive power and of raw material, and especially if 
we devise machinery that works rapidly and accurately 
and greatly multiplies the product of a man's working 
day, we shall reach a condition in which, instead of a 
loss incidental to the early years of manufacturing, 
we shall have an increasing gain that will continue 
to the end of time. It may be, further, that without 
protection and the burdensome tax which it did un- 
doubtedly impose upon us, we should have had to wait 
far too long for this gain to accrue and should have 
sacrificed the benefits that come from a long interval 
of diversified and fruitful industry. 

In short, the static argument for free trade is un- 
answerable and the dynamic argument for protection, 
when intelligently stated, is equally so. The two argu- 
ments do not meet and refute each other, but are 
mutually consistent. It is possible to ridicule the 
argument for protection under the name of the '' infant 
industry" argument, and it is possible for the policy 
it upholds to continue long after this argument has 
ceased to be valid. The overgrown infant will have 
sacrificed his claim for coddling, but that will not prove 
that there was never a time when he needed it. 

The Policy demanded in View of Facts Static and 
Dynamic. — Now, there is an argument for tariff 
reduction which accepts both the static argument 
for free trade and the dynamic argument for protec- 
tion. In fact, it bases itself on the protectionist's 
modern and intelligent claim. To advance in any 
form the infant industry argument is to admit that 



PROTECTION AND MONOPOLY 523 

the policy advocated is temporary. Protective duties 
are, in fact, self-testing. They reveal in their very 
working whether they were originally justifiable or 
•not. The ground on which they were imposed is that 
they would develop latent resources — that they 
would enable labor to produce as much by making a 
class of articles formerly produced in foreign countries 
as it could produce by engaging in industries already 
established and exchanging their products for the 
former articles. If that time should come, the indus- 
try that had to grow up originally under the protection 
of a duty would become so fruitful that it could dis- 
pense with the duty. Taxes of this kind tend to 
become inoperative, provided always that the latent 
resources for economical production really exist. 

Some years ago a man who had retired from the 
business of making spool silk remarked that, in his 
judgment, a duty of three per cent on imported silk of 
this kind would enable the American mills to hold full 
possession of their own market. The difference be- 
tween what it cost the foreigner to make the silk and 
what it cost the American to make it was, as he 
thought, not over three per cent. If he was right in his 
estimate, almost all of the actual duty might have 
been abolished without crushing the American manu- 
facturer. Americans had developed a sufficient apti- 
tude for making spool silk to be able to get nearly as 
much of it by turning their labor in that direction as 
they could by turning their labor in any other direction 
and exchanging the product for foreign silk. We must 
originally have lost much by forcing ourselves directly 
to make the silk, for, at the outset, we could not make 
it as economically as we could make an article which 
we could exchange for it. At the time of which we 



524 ESSENTIALS OF ECONOMIC THEORY 

are speaking we could make it with almost no waste, 
and the case illustrates a general fact with regard to 
duties upon articles in the making of which we are 
originally at a disadvantage but are afterward at no 
disadvantage at all. When our original disadvantage 
has been quite overcome, the duty becomes inopera- 
tive. Whether we keep it or throw it off will make no 
difference to the American manufacturer or to the 
American consumer — provided always that competi- 
tion is free and active. If it is not so, there is a very 
different story to tell. 

Importance of Changes in the Relative Productivity 
of Different Industries. — Instead of getting from the 
soil gold dust to barter for merchandise, we have been 
getting a product that is not so greatly unlike it. For 
grains of gold read kernels of wheat, and the statement 
will tell what a large portion of our country has pro- 
duced and exported. The productivity of wheat 
raising has made it uneconomical, in certain extensive 
regions, to engage in other occupations; but as the 
fertility of the wheat lands has declined, and as the 
productive power of labor in other directions has in- 
creased, we have reached a point at which it is just 
as natural to make things for which we formerly 
bartered wheat as it is to produce the grain itself. 
The decline in the fertility of agricultural lands 
and the increase in the productive power of labor de- 
voted to making steel appear to have made the manu- 
facturer of the latter article as independent as is the 
raiser of cereals. Originally it was necessary to pro- 
tect iron and steel industries from competition in or- 
der to secure the establishment of them at an early 
day. Now it is apparently not necessary to continue 
the protection. Labor in making steel will give us 



PROTECTION AND MONOPOLY 525 

as many tons of it in a year as the same labor would 
give us if spent in the raising of wheat to be exchanged 
for foreign steel. The duty on steel, if this is the case, 
• has become inoperative, in the sense that it no longer 
acts to save from destruction the steel-making indus- 
try. It is perniciously operative in another direction, 
for it is an essential protector of a quasi-monopoly in 
the industry ; and this illustrates what often happens 
in cases in which the infant industry argument proves 
to be well grounded. The argument predicts for the 
newly established industry a great future develop- 
ment and a time of ultimate independence. Protec- 
tion undertakes to nurse it through its period of help- 
lessness and dependence into a time when it can stand 
on its own feet and maintain itself against rivals. If 
that period comes, — and the history of the United 
States shows that in many cases it has come, — you 
can throw off the entire duty, if you will, and, unless 
the price of the article has been artificially sustained 
by something besides the duty, our manufacturers 
will not lose possession of their market. 

An essential condition of realizing the happy pre- 
dictions of the protectionists is that competition among 
American producers should be unimpeded. If that 
were so, goods would, as they said, be sold, in the end, 
at prices fixed by the costs of production, including 
the normal rate of interest on the capital employed. 
Manufacturers may originally get large profits, as an 
offset for such risks as they take in doing pioneer 
work; but afterward they will get interest on their 
capital and a good personal return for directing their 
business, but nothing more. If they sell goods at 
prices which yield only such returns as this, they will, 
when the industry is on its feet, sell them as cheaply 



526 ESSENTIALS OF ECONOMIC THEORY 

as the foreigner would do. The high duty, if it still 
continues, may make it doubly difficult for the for- 
eigner to come into our market ; but with goods selling 
at natural cost or cost prices he would not come into 
it in any case, and the duty might be abolished with 
entire impunity. 

There are, indeed, some questions which arise as 
to occasional unloading of extensive stocks in foreign 
markets, and protection has been called for to prevent 
the foreigner from making America his "dumping 
ground." This process works in both ways: the 
American can dump his surplus products into foreign 
territory as well as the foreigner can into American 
territory. Not much attention need be paid to this 
particular phase of the subject. Conservatism will 
probably suffice, for a long time, to retain in force a 
somewhat higher duty than is called for on general 
grounds. In the main the fact is as stated : if the 
protected infant has the capacity for growth that was 
attributed to him when the course of nursing, coddling, 
training, and patient waiting was entered upon, he 
will announce that fact after a term of years by 
showing his inherent strength and proving that these 
fostering practices are no longer necessary. They are 
then needed only to aid a monopolistic power within 
the industry. 

The Protection of Industries distinguished from the 
Protection of Monopolies. — It appears, then, that 
duties have two distinct functions. One is to protect 
from foreign competition an industry as such — to 
shield every producer, whether he is working inde- 
pendently or in a pool or trust. The other function 
is to protect a trust in the industry — to enable a 
great combination working within the limits of the 



PROTECTION AND MONOPOLY 527 

United States to keep that great field to itself and still 
charge abnormally high prices for its products. In 
fact, a distinguishable part of a duty usually performs 
the former of these functions, and another distinguish- 
able part performs the latter. If the natural price of 
an article is based on the cost of making it in the United 
States, and if that is twenty per cent higher than the 
cost in a foreign country, a duty of twenty per cent 
will place the American product and the foreign prod- 
uct on an equality. The American maker will not 
be driven from his market until he begins to charge 
an abnormally high price. If he does that, the for- 
eigner will come in. Suppose, then, that the duty is 
forty per cent. Twenty per cent may be needed to 
enable the American manufacturer to hold his own as 
against the foreigner. Provided he exacts from con- 
sumers of his goods only the natural returns which 
business yields, year in and year out, he can sell all 
that his mills produce with no danger that the 
foreigner will supplant him. The other twenty per 
cent of duty enables him to add a monopolistic profit 
to his prices. He can raise them by about that 
amount above what is natural before the foreigner 
will begin to make him trouble. 

We have seen what ways the trust has of stifling 
competition within the limits of our own country. 
There are the favors which it is able to get from the 
railroads, and there is the practice of selling its goods 
in some one locality at a cut-throat rate whenever a 
competitor appears in that locality. There is the so- 
called factors' agreement, which often forces merchants 
to buy goods of a certain class exclusively from the 
trust. By these means and others the trust makes it 
perilous to build a mill for the purpose of competing 



528 ESSENTIALS OF ECONOMIC THEORY 

with it. If, indeed, it makes its prices very high, some 
bold adventurer will build such a mill and take the 
chances that this entails ; but if the trust stops short 
of offering such a tempting lure in the way of high 
prices, it can keep the field to itself. If the extra 
duty of twenty per cent — the unnecessary portion 
of the whole duty of forty per cent — did not exist, 
nothing of this sort would be possible. The trust 
would have to sell at a normal price in order to keep 
out the foreigner, and so would its independent com- 
petitor. Both the combination and its rivals could 
make their goods and sell them in security. The 
industry, as such, is protected by the duty of twenty 
per cent, and it is the additional duty which is the 
protector of monopoly — the enabling cause of the 
grab which the trust can make from the pockets of 
the consuming public. 

In practice one would not try to make the figures 
quite as exact as is implied in the statement that just 
twenty per cent of duty is needed to protect the indus- 
try as such from the foreigner, and that just another 
twenty per cent acts as a maker of a monopolistic 
price. It would be impracticable to fix the duty in 
such a way as exactly to meet the need of protection. 
Owing to fluctuations in values, the duty might be 
made slightly higher than is necessary under normal 
conditions. All these things would have to be con- 
sidered by a competent tariff commission. The figures 
we here use are illustrative only ; but the principle is 
as clear as anything in economics. Protecting an 
industry, as such, is one thing; it means that Ameri- 
cans shall be enabled to hold possession of their mar- 
ket, provided they charge prices for their goods which 
yield a fair profit only. Protecting a monopoly in 



PROTECTION AND MONOPOLY 529 

the industry is another thing; it means that foreign 
competition is to be cut off even when the American 
producer charges unnatural prices. It means that 
the trust shall be enabled to sell a portion of its goods 
abroad at one price and the remainder at home at a 
much higher price. It means that the trust is to be 
shielded from all competition, except that which may 
come from audacious rivals at home who are willing 
to brave the perils of entering the American field pro- 
vided that the prices which here rule afford profit 
enough to justify the risk. 

A Limit beyond which a Duty becomes a Supporter 
of Monopolies. — This line of cleavage runs through 
the greater part of the duties which this country 
now imposes on foreign articles ; and the fact reveals 
the scientific rule for tariff reduction. Up to a certain 
point, according to the traditional American view, 
the duty may do good. It may be protecting an in- 
dustry that is not quite an infant and yet has not 
grown to its full stature nor attained to its full com- 
peting power. Whatever may be claimed as to what 
ought to be done with this portion of the duty, there 
is no doubt what will be done ; it will be retained, and 
the American people will wait with such patience as 
they may for the coming of the time when the indus- 
try will be independent of all such aid. Beyond this 
point a protective duty becomes a trust builder par 
excellence. 

Most Duties Compounds of Good and Evil. — There 
are some industries which are fully matured. The 
duties which were imposed to shield them during their 
infancy are no longer necessary for that purpose. 
The amount of protection that in these cases is neces- 
sary to keep the American market for the American 

2m 



530 ESSENTIALS OF ECONOMIC THEORY 

product is nil. The sole effect of duties on the prod- 
ucts of such industries is to encourage monopoly. 
At the other extreme there are a few industries which 
have not gravitated into the control of monopolies 
and which need much of the protection that they have 
in order to hold their present fields. If they really 
are infants and not dwarfs, — if they have the ca- 
pacity to grow to full stature and independence, — 
the policy of the people will undoubtedly be to let 
them keep, for a considerable time, all the protection 
that they now enjoy. The number of such industries 
as this is comparatively small. In the case of the 
great majority of our duties there is one part that 
protects the industry as such and another part that 
protects the monopoly within it. Throw off the whole 
duty, and you expose the independent rivals of the 
trust, as well as the trust itself, to a foreign competi- 
tion which they are hardly able to bear; but if you 
throw off a part of the duty, — the part which serves 
to create the monopoly, — you do not destroy and 
probably do not hurt the independent producer. His 
position now is abnormal and perilous. He may be 
continuing solely by grace of a power that could crush 
him any day if it would, and its power to crush him is 
due to the great gains which its position as a monopoly 
affords. When it wishes to crush a local rival, it can 
enter his territory and, within that area, sell goods 
for less than it costs to make them; and, while 
pursuing this cut-throat policy, it can still make 
money, because it is getting high prices in the other 
parts of its extensive territory. With no such great 
general returns to draw on as a war fund, the trust 
would have to compete with its rivals on terms which 
would be at least more nearly even than they now 



PROTECTION AND MONOPOLY 531 

are. It would still have weapons which it could em- 
ploy against competitors, and its capacity for fighting 
unfairly would not be exhausted. Without further 
action on the part of lawmakers the position of a 
small rival of a trust might be unnaturally dangerous ; 
but an essential point is that one means which the 
trust adopts in order to crush him depends on the 
existence of great profits in most of its territory; 
and these would not exist if it were not for the unneces- 
sary and abnormal part of the duty. 

The trust wants its duty, and it wants the whole of 
it. It is the perennial defender of the policy which is 
termed "standing pat." It values the monopoly- 
making part according to the measure of the profits 
which that part brings into its coffers. The trust is 
powerful, as we do not need to be told, and it will 
find ways of thwarting tariff reduction as it does other 
anti-trust legislation. Drastic laws forced through 
legislatures or Congress during ebullitions of popular 
wrath — laws which demand so much in the way of 
trust breaking that they will never be enforced and 
never ought to be — have not, thus far, been pre- 
vented. Such "bulls against the comet" have been 
issued frequently enough, but serious legislation, 
based on sound principles, will encounter graver 
difficulties. There are difficulties before our people 
even where they see clearly what they want and are 
trying to get it ; but where they do not see what they 
want, the case is hopeless. The trust-making part of 
protective duties has an effect about which there is no 
uncertainty, and if the American people discover this 
fact, they will not have reached their goal, but the 
laborious route that leads to it will at least lie dis- 
tinctly before them. 



532 ESSENTIALS OF ECONOMIC THEORY 

The Policy demanded in the Interest of Progress. — 
The general facts which have here been cited call for 
the abolition of a certain part of the existing duties 
and the retention of another part, and they make the 
division between the two parts clear at least in prin- 
ciple. We want to keep one part of a duty whenever 
it protects an industry which is not yet mature but is 
on its way toward maturity. We want the industry 
because it is progressive in its wealth-creating power 
and will, one day, make an important addition to our 
national income. It is a dynamic agent — a factor 
in the progress we are making toward the unrealized 
goal of universal comfort. We do not want the other 
part of the duty, first, because we do not want 
monopoly. Any feature of our industrial system 
which is convicted of being simply a monopoly-build- 
ing element is condemned by that fact to extinction, 
if the power of the people suffices to destroy it. Does 
this mean that the consolidations themselves are thus 
condemned? Do we not want great corporations 
with vast capitals? Assuredly we want them, for 
the sake of their economy and of their capacity for 
greater economy. With the element of monopoly 
taken out of them, they will become dynamic agents 
and contributors to general progress. The part of 
the protective tariff which we need to get rid of is the 
part that helps decisively to put the element of 
monopoly into them ; and in that connection the worst 
charge that has to be brought against this part of 
the duties remains to be stated. 

Protection and Progress. — Monopoly acts squarely 
against the continuance of that very progress which 
the tariff was designed to create. The entire defense 
of protection has rested on the dynamic argument, 



PROTECTION AND MONOPOLY 533 

and the sole justification of the tax which protection 
originally imposed is the fact that it has given us in- 
dustries which have, in themselves, the power to be- 
come more and more productive. It would be hard to 
deny that much of this increase in productive power, 
which the originators of the protective system antici- 
pated, has been practically realized. The manufac- 
tures which have been carried through a period of 
weakness have actually developed competing strength. 
We have acquired the power to make things far 
more cheaply than any one could formerly make them, 
and the cheapening process still goes on. Our manu- 
facturing centers are alive with machinery, much of 
which is of our own devising. Thanks to the progres- 
sive character of these industries, the waste which 
attended the introduction of them has been largely 
atoned for. On dynamic grounds, and solely on those 
grounds, has the policy of protection fairly well vindi- 
cated itself. And now we have come to the point 
where that saving element in the protective system is 
in danger of vanishing. Indeed, the excessive part of 
the protective tariff now acts positively to check the 
progress that it once initiated, for monopoly is hostile 
to that progress. The whole force of the argument 
based on mechanical invention and the development 
of latent aptitudes in our people now holds as against 
the monopoly-building part of the tariff. Keep that 
portion of a duty which is not needed to save an in- 
dependent producer from foreign competition, which is 
needed only to enable the trust to charge an abnormal 
price and still keep the foreigner out of our markets, 
and you build up a monopoly which is unfavorable 
to continued improvement in the productive arts. 
Competition is the assured guarantee of all such 



534 ESSENTIALS OF ECONOMIC THEORY 

progress. It causes a race of improvement in which 
eager rivals strive with each other to see who can get 
the best result from a day's labor. It puts the pro- 
ducer where he must be enterprising or drop out of the 
race. He must invent machines and processes, or 
adopt them as others discover them. He must or- 
ganize, explore markets, and study consumers' wants. 
He must keep abreast of a rapidly moving procession 
if he expects to continue long to be a producer at all. 
The Effect on Progress of Consolidation without Mo- 
nopoly. — Does a monopoly live under any such for- 
ward pressure? Certainly not. It may make some 
improvements, for it can gain wealth by so doing; 
but it is not forced to make them or perish. Here we 
encounter a wide distinction that is in danger of being 
overlooked. A vast corporation that is not a true 
monopoly may be eminently progressive. If it still 
has to fear rivals, actual or potential, it is under the 
same kind of pressure that acts upon the independent 
producer — pressure to economize labor. It may 
be able to make even greater progress than a smaller 
corporation could make, for it may be able to hire 
ingenious men to devise new appliances, and it may be 
able to test them without greatly trenching on its in- 
come by such experiments. AVhen it gets a successful 
machine, it may introduce it at once into many mills. 
Consolidation without monopoly is favorable to prog- 
ress. With the element of monopoly infused into it, 
a great consolidation frees itself from the necessity 
for progress, and both experience and a priori reason- 
ing are against the conclusion that, under such a re- 
gime, actual progress will be rapid. The secure 
monopoly may stagnate with impunity, and the rea- 
son why many corporations which have looked like 



PROTECTION AND MONOPOLY 535 

monopolies have not actually stagnated is that their 
positions have not been thus secure. They have had 
some actual rivals and many potential ones. The 
part of the protective system which tends to make 
them more secure in their monopolistic position strikes 
at the most vital part of the industrial system, the 
progress within it, the element which adds daily to 
man's power to create wealth and enables the world 
to sustain an increasing population in an increasing 
degree of comfort. True monopoly means stagnation, 
oppression, and what has been called a new feudalism, 
while consolidation without monopoly means progress, 
freedom, and a constant approach to industrial de- 
mocracy. One of the essential means of securing this 
latter result is the retention of so much protection as 
is needed to keep American ingenuity and organizing 
power alive and active, while abolishing that excess of it 
which fosters monopoly and does away with the neces- 
sity for exercising these traits. There will be dis- 
agreement as to the point at which the dividing line 
should, in particular cases, be drawn; a protected 
interest will claim a duty of fifty per cent where 
twenty would amply suffice and where every excess 
above this would be pernicious. There should, how- 
ever, be no serious disagreement as to what we want — 
progress and the repression of monopoly which bars 
progress; and there should be little disagreement as 
to the principle to be followed in making a protective 
system contribute to these ends. It must assuredly 
not bar out the foreigner when the American trust 
has put its prices at an extortionate level and is using 
its power to crush all rivalry at home. The good 
effect and the evil effect of an excessive duty are quite 
distinct in principle, and the task that is before us is 



536 ESSENTIALS OF ECONOMIC THEORY 

to make them so in practice. It is to abolish the 
monopoly-building part of the protective system. 

The whole question of the relation of the tariff to 
monopoly presents debatable points, some of which 
cannot here be discussed. It is by no means claimed 
that an unnaturally high tariff is the sole means of sus- 
taining monopolies, or that the reduction of it would 
leave nothing more to be done. A great corporation, 
as has already been said, possesses special means of 
waging a predatory war against local rivals, and its 
monopolistic power depends on these as well as on the 
tariff. With the foreigner forced off the field the trust 
can use with terrible effect these means of attack 
on local rivals. It is true, as we have seen, that its 
monopolistic power might be greatly reduced, without 
touching the tariff, by taking from it its command of 
freight rates and thus destroying its power to undersell 
rivals by means of the special rebates which it now 
receives ; and its power for evil might be reduced still 
more by taking from it its privilege of cutting prices 
on its own goods in one locality while charging else- 
where the high prices which the exclusion of the for- 
eigner enables it to get. Regulating trusts by these 
means only and without any change in the protective 
system would require, on the part of the people, a long 
and hard struggle. It would require heroic persist- 
ence in a course of difficult administration. Success 
will come more quickly and easily if, while keeping a 
normal amount of protection, we abolish the ab- 
normal part of it. The other measures for controlling 
trusts harmonize with this one and will work more 
effectively if they are used in combination with it. To- 
gether with this one they remove a barrier against 
progress and set in action a force that promotes it. 



PEOTECTION AND MONOPOLY 537 

Without going into any intricacies one can see that, 
with the tariff at a normal level, the success of the trust 
in making money will depend on its efficiency as a pro- 
ducer; and the same will be true of its independent 
rivals. Again and again it will then happen that 
new rivals will appear, whose mills are far more effi- 
cient than many which the trust operates. They 
may even be more efficient than the best of the mills 
of the great combination. American producers and 
foreigners will be in eager rivalry with each other in 
seeking out means of reducing costs or — what is the 
same thing — increasing the product of a day's labor. 
Under the conditions here supposed, the trust will 
not be able to exterminate a really efficient competitor, 
and it will feel the stimulus of his rivalry in a way 
that will force it to be alert and enterprising in seek- 
ing and using new devices for economical production. 
The trust and its American competitor will alike feel 
the stimulus of the foreigner's efforts to surpass them 
both in methods of efficient production ; and the out- 
come ,of it all will be a greater degree of progress — a 
more dynamic industrial world — than there is any 
hope of realizing while foreigners are excluded from 
our markets even when prices are there extortionate. 
Prices will be extortionate so long as the trusts are 
checked only by local rivals and are allowed to club 
these rivals into submissiveness. Keeping the for- 
eigner away by competing fairly with him is what we 
should desire; but barring him forcibly out, even 
when prices mount to extravagant levels, helps to 
fasten on this country the various evils which are 
included under the ill-omened term monopoly; and 
among the worst of these evils are a weakening 
of dynamic energy and a reduction of progress. 



CHAPTER XXIX 

LEADING FACTS CONCERNING MONEY 

Dynamic Qualities of Money. — The question con- 
cerning money which, for the purposes of the present 
treatise, it is most important to answer is whether 
general prosperity can be increased or impaired by 
manipulating the volume of it. Is money a dynamic 
agent, and can it be so regulated as to induce economic 
progress ? These questions require careful answers. 

Accented Facts concerning Money. — We may ac- 
cept without argument the conclusion that both theory 
and experience have reached concerning the superi- 
ority of gold and silver over other materials of which 
a currency can be made. They possess the univer- 
sally recognized utility which makes them everywhere 
in demand. They have the "imperishability," the 
"portability," and the " divisibility " which are needed, 
and when made into coins, they have the "cogniza- 
bility" by which they can, more readily than many 
other things, be identified and distinguished from 
cheap imitations. There remain to be settled the 
questions whether an expanding volume of currency 
is necessary for prosperity, and whether the expan- 
sion can better be secured by using two metals than it 
can by using one. 

Effects of Free Coinage. — It is evident that when a 
government coins without charge all the gold and silver 
that are brought to it for that purpose, cither metal 
will be worth about as much in the form of bullion as 

638 



LEADING FACTS CONCERNING MONEY 539 

it is in the form of coin. If, for uses in the arts, an 
ounce of gold is worth more than the number of dollars 
that can be made of it, the coining of this metal will 
.temporarily cease and some coins already made will 
be melted. Moreover, where both of the precious 
metals are used as money, neither of them can long 
be worth in a coin much more than is the bullion con- 
tained in the less valuable of the two. If a gold dollar 
will buy more silver than is needed to make a silver 
dollar, because of the higher value of the bullion in the 
former coin, silver will be bought and taken to the 
mint for coinage, while gold dollars will be melted. 
The gold will go farther in the way of paying debts 
when it is in this way exchanged for silver money. 

The Effects of Inflation of Currency on Prices. — 
We are citing a further accepted fact when we say 
that, other things being equal, enlarging the volume of 
currency in use raises the prices of goods. By what 
particular mechanism this is brought about we 
do not here inquire. Not ever3^thing that is claimed 
under the head of a "quantity theory of money" is 
generally believed, but there will be little disposition 
anywhere to deny that, if no other dynamic movement 
should take place, adding fifty per cent to the volume 
of metallic money in circulation would make prices 
higher than they were before the addition. 

Rising Prices and Business Profits. — If we assert, 
further, that permanently rising prices mean pros- 
perity, — profits for the entrepreneur and a brisk de- 
mand for labor and capital, — we assert what, in the 
practical world, is too generally accepted. Sound 
theory and current belief are at variance on this point, 
and the current opinion appears at first glance to have 
the facts on its side. Periods of rising prices have 



540 ESSENTIALS OF ECONOMIC THEORY 

actually been periods of prosperity. It is considered 
hard for either a merchant or a manufacturer "to do 
business on a falling market," and easy to make 
money on a rising one. This impression is entirely 
correct in so far as it concerns those fluctuations of 
price which occur suddenly and continue only briefly. 
What it is of great importance to know is whether a 
steady rise of prices which should continue permanently 
would mean permanent profits for the entrepreneur; 
and it can be asserted without hesitation that it would 
not do so if the final productivity theory of interest 
is sound, that is, if capital commands in the market 
a rate of interest which corresponds to the amount that 
the marginal increment of it will actually produce. 

The Rate of Expansion of Currency distinguished 
from the Absolute Amount of Increase. — The extent 
to which any currency is capable of raising prices by 
a continued expansion depends, not on the absolute 
amount of that expansion, but on the percentage of 
enlargement that takes place within a given time. 
Moreover, a given percentage of increase per annum 
may be maintained as well by one metal as by two. 
If the gold and the silver money of the world were each 
increased by one per cent a year, prices would have the 
same trend under a currency made of one metal as 
under a currency made of both. If, on the other hand, 
all the currencies were based on gold only, a change 
to a bimetallic system would at once make a single 
great enlargement of the volume of money ; but after 
this the rate of enlargement would be no greater than 
it was under the single standard. In the transition 
from a gold to a bimetallic currency, we should get 
rapidly rising prices ; after the change had been com- 
pleted, we should have a currency expanding as before 



LEADING FACTS CONCERNING MONEY 541 

at the one per cent rate. If the volume of business 
were to increase at the rate of two per cent a year, 
while other influences affecting prices were to remain 
•unchanged, the currency would not expand as rapidly 
as the demand for it, and prices would not only fall, 
but would fall at the same rate as if only one metal 
had been used. Use ten metals instead of two, — 
make coins of tin, platinum, copper, nickel, etc., — and 
if the grand composite still insures the one per cent 
rate of general increase of metallic money, prices will 
vary as they would have varied with a currency of gold 
alone. Wholly transitional, under such circumstances, 
is the rise in prices secured by the adoption of bimetal- 
lism. It is gained by adding to the stock of gold now 
used for ultimate payments an existing stock of silver. 
Why Metallic Currency of Any Kind gains, in the 
Long Run, in Purchasing Power. — In the long run, 
almost any metallic coin of a fixed weight will gain in 
its purchasing power. Silver would do this as well as 
gold ; and so would a composite coinage made of ten 
metals. The law of diminishing returns applies to 
mining as well as to agriculture. The more silver 
you want, the deeper you must dig for it, and the more 
refractory ores you must smelt. The transmuting of a 
raw metal into finished articles becomes a cheaper 
and cheaper process ; but the extracting of the metal 
itself becomes dearer. A larger and larger fraction of 
the labor that is spent in making wares of silver, of 
gold, of copper, or of tin must be spent in getting the 
crude material out of the earth. There are improve- 
ments in mining, as there are in other industries, and 
there are large improvements in smelting ; but in spite 
of this the continual working of more difficult mines 
and of more difficult ores makes the getting of the crude 



542 ESSENTIALS OF ECONOMIC THEORY 

material, in the long run, relatively costly. Since a 
coin consists chiefly of raw metal, we may therefore 
count on having before us a regime of falling prices, 
whatever metallic currency we adopt. The rate of 
the fall and the degree of steadiness in it will be 
greater with some metals than with others. The 
variations in the value of gold are, on the whole, 
comparatively steady. This metal fluctuates in 
amount and in cost, but the changes are less sudden 
than in the case of most others. 

The Steadiness of the Change in the Purchasing Power 
of Money the Important Fact. — A second fact to be 
noted is that the best currency is one the purchasing 
power of which shall change, if at all, at a compara- 
tively uniform rate. This fact is of paramount conse- 
quence, and the verification of it will repay any amount 
of study. It is not the rapidity with which gold gains 
in purchasing power, but the steadiness of the gain 
from year to year that determines whether it is the 
best money that can be had by the business world. 
A change in the rate of increase in the purchasing power 
of the coinage metal has a really disturbing effect; 
a steady and calculable appreciation does not. There 
exists in some acute minds what I venture to call a 
delusion about the effect on business classes of an ad- 
vance in the purchasing power of gold that proceeds 
for a long time at a uniform rate. Conceding the 
prospect of a decided gain in the value of this metal, 
we may deny absolutely that, if it is steady, it plays 
into the hands of creditors, burdens the entrepreneur, 
blights enterprise, or has any of the effects that cer- 
tain men whom we are bound to respect have claimed 
for it. Irregular changes of value would, indeed, pro- 
duce these results. Let gold gain three per cent in 



LEADING FACTS CONCERNING MONEY 543 

value this year, one per cent next year, and four per 
cent in the year following, and injurious things will 
happen; but let it gain even as much as three per 
■cent each year for a century, and at the test points in 
business life there will ensue the essential effects that 
would have followed if it had not gained at all. 

This means that with a steadily appreciating cur- 
rency the things will happen that make for prosperity. 
The debtor will get justice, enterprise will be safe, 
and wages will gain while industry gains. The entre- 
preneur, in whose behalf bad counsel has lately been 
given, will best do his strategic work, not with that 
currency which varies in value the least, but with that 
which varies most uniformly. If it appears that gold 
is likely to appreciate more than silver, and to appre- 
ciate more steadily, it is decidedly the better metal. 
It is not inflation on which the entrepreneur per- 
manently thrives, nor is it contraction through which, 
in the long run, he suffers ; it is changes in the rate of 
inflation or of contraction that produce marked and 
damaging effects at the critical points of business life. 

Loan Interest as related to the Increase of Real Capi- 
tal. — How does a slow and steady appreciation of any 
metallic currency affect the relations of business 
classes? Does it rob borrowers and enrich lenders? 
Does it favor the consumers by giving falling prices, 
and hurt producers in the same degree ? Does it tax 
enterprise and paralyze the nerves of business ? The 
answer is an emphatic No. Steadiness in the rate of 
appreciation of money is the salvation of business. 
Not by one iota can such a slow and steady move- 
ment, in itself alone, rob the borrowing class. This 
is a sweeping claim; let us examine it. 

It has been shown that true interest is governed by 



544 ESSENTIALS OF ECONOMIC THEORY 

the marginal productivity of capital. As the utility 
of the final increment of a commodity fixes the price 
that a seller can get for his whole supply, so the produc- 
tive power of the final unit of capital expresses what the 
owner of capital can get by lending his entire supply. 
This earning capacity expresses itself in a percentage 
of the capital itself. If the final unit can create a 
twentieth of itself in a year, any unit can get for its 
owner about that amount. 

In assuming that capital earns a twentieth of itself 
in a year, we may use a commodity standard of meas- 
urement. A grocer's capital of twenty barrels of su- 
gar may become twenty-one barrels, and his flour 
and his tea increase in a like proportion. In the sim- 
plest illustration that could be given of a capital earn- 
ing five per cent a year, we should assume that each 
kind of productive instrument in a man's possession 
increases in quantity, during the year, by that 
amount. If he be a manufacturer, his mill becomes 
a hundred and five feet long, instead of a hundred feet. 
It contains twenty-one sets of woolen machinery, 
instead of twenty. The flow of water that furnishes 
power becomes by five per cent more copious; 
and the stock of goods, raw, unfinished, and finished, 
becomes larger by the same amount. 

Of course, such a symmetrical enlargement of all 
kinds of goods could never actually take place, for 
some things increase in quantity more than others. 
The illustration shows, however, what fixes the rate of 
interest : it is the self-increasing power of a miscellany 
of real capital. If the mill, the machinery, the stock, 
grow in quantity at the five per cent rate, that is the 
natural rate of interest on loans of real capital. The 
lender gives to the borrower twenty units of "com- 



LEADING FACTS CONCERNING MONEY 545 

modity" and gets back twenty-one. If marginal 
social capital, consisting of commodity and measured 
in some way in units of kind, has the power to add to 
itself in a year one unit for every twenty, lenders will 
claim about that amount, and borrowers will pay it. 

How the Increase of a Miscellany of Goods has to he 
Computed. — How does the real earning capacity of 
capital in concrete forms reveal itself ? How does the 
grocer know that he can make five per cent with the 
final unit of capital that he borrows? Not by the 
fact that each lot of twenty barrels of sugar gains one 
barrel, .that each lot of twenty pounds of tea gains one 
pound, and so on. If there were to be such a sym- 
metrical all-around increase in the commodities in 
the man's possession, his shelves, counters, bins, tanks, 
would have to enlarge themselves in the same ratio. 
In the case of a manufacturer the mill would have to 
elongate itself by one foot for every twenty, as in the 
foregoing illustration, and the machinery and all the 
stock would have to grow in the same proportion. 
The lajid and the water power would have to enlarge 
themselves by the same constant fraction. 

Of course, such a thing does not take place. The 
general amount of capital goods of every kind enlarges ; 
but the enlargement is in practice computed in mone- 
tary value, and in no other way. The whole outfit 
becomes worth more than it was. The increase in 
monetary value gauges the claims of the capitalist. 
If the stock of goods has grown generally larger, and 
if prices have fallen, the claim of the capitalist will 
fall short of equaling the actual increase of the mer- 
chandise. 

The increase in goods of different kinds is, of course, 
unsymmetrical. If the man is a manufacturer, his 
2n 



546 ESSENTIALS OF ECONOMIC THEORY 

mill and his water power have probably not increased. 
He may have some more machinery, and he has more 
raw materials and more goods, finished or unfinished, 
than he had when he took his last inventory. If he 
has not more goods of these kinds, he has something 
that represents them; and the effect on his fortunes 
is as if the mill had stretched itself, and as if the 
machines and other capital had multiplied, all in the 
same ratio. 

The man figures his gains in real wealth by the use 
of money. At the end of the year he makes a list of 
all his goods, attaches prices to them, and sees what 
the value of the stock has become by the year's 
business. He compares the total value in money 
of the goods on hand in January, 1907, with that of the 
stock of January, 1906. If he has bought and sold 
for cash only, and if during the year he has dra\^Ti for 
his maintenance only what he has earned by labor, 
the excess of value on hand at the beginning of the 
year 1907 informs him what his capital has earned 
during the preceding twelve months. 

The Effect of Changes of Price on the Claims of 
Capitalists. — If prices have remained stable, the 
earnings of the capital as expressed in money will 
accurately correspond with the earnings as computed 
in commodity. It is as if the five per cent increase of 
the sugar and the flour of our first illustration, or of 
the mill and the machinery of the second, had taken 
place. It could then, by a sale, be converted into a 
five per cent increase in money. By selling the stock 
at its market value the merchant could realize five per 
cent more than the original stock cost him. 

If money has gained one per cent in its purchasing 
power, or if prices at the end of the year are by so 



LEADING FACTS CONCERNING MONEY 547 

much lower, the inventory will show, in terms of 
money, only a four per cent gain. Now, the real 
increase of concrete capital is still five per cent, and 
that, by the law of interest, is what the capitalist can 
claim in commodities. This claim is met by an actual 
payment in money of four per cent. Give to the 
capitalist, in January, 1896, a dollar and four cents 
for every dollar he has loaned in January, 1895, and 
you enable him to command a hundred and five units 
of commodity for every one hundred that he com- 
manded at the earlier date.^ You give him by a re- 
duced monetary payment what is equivalent to the 
real increase of capital. 

Practical Differences between Real Interest and the 
Increase of Real Capital. — It is the increase of capital 
in kind that fixes the rate of loan interest. Care 
must be taken not to claim for this part of the adjust- 
ment any unerring accuracy; for the marginal pro- 
ductivity law does not work without friction. With 
real capital creating five and a half per cent, the lender 
might get only five. When, however, the play of 
forces that fixes real interest has had its way and has 
determined that, in commodity, capital shall secure 
for its owners five per cent a year, that amount is 
unerringly conveyed to them by the monetary pay- 
ments that follow. If, by paying four per cent as 
interest, the merchant, in the illustrative case, makes 
over to the lender of capital that part of the increase 
of goods that by the law of interest falls to him, four 

' There is a slight compounding here to be taken into account. 
If commodity has gained five per cent, while prices have lost 
one per cent, the capital as measured in money has increased 
by three and ninety-five one-hundredths per cent instead of 
exactly four. 



548 ESSENTIALS OF ECONOMIC THEORY 

per cent is the rate that the loan in money will bring. 
This is on the supposition that the change in the pm-- 
chasing power of money is perfectly steady. If it is 
unsteady, effects will follow that are of much conse- 
quence. 

Changes in the purchasing power of a currency pro- 
duce an effect on the rate of interest on loans of 
''money." If, with a currency of perfectly stable 
value, the interest on loans is five per cent, correspond- 
ing to the earnings of real capital, then a gain in the 
purchasing power of the currency of one per cent a year 
has the effect of reducing nominal interest practically 
to four per cent. The debtor then really pays and the 
creditor really gets the same percentage as before of 
the actual capital loaned. The borrower, the entre- 
preneur in the case, finds at the end of the year that 
he has more commodities by five one-hundredths 
than he had. He must pay the equivalent of this to 
the lender. With money of stable purchasing power 
it takes five new dollars for every hundred to do it ; 
but with money that gains in its power to buy goods 
at the rate of one per cent a year it takes only four. 
The rate of interest on loans is, in the long run, re- 
duced by an amount that accurately corresponds with 
the appreciation of the monetary metal wherever the 
appreciation is steady. This law works with a pre- 
cision that is unusual in the case of economic laws. 
Loan interest varies more or less from the marginal 
earnings of capital; but interest as paid in raoney 
accurately expresses interest as determined in kind 
by the play of economic forces. 

Conscious Forecasts not necessary for Insuring the 
Adjustment of Loan Interest to Changing Prices. — 
It is possible that, where this subject has been con- 



LEADING FACTS CONCERNING MONEY 549 

sidered, the impression may prevail that this reduction 
in the nominal rate of interest is the result of foresight 
on the part of borrower and lender. According to that 
view, both parties look forward to the time when the 
loan will be paid. The borrower sees that, although 
by means of his business he may have at the end of a 
year five per cent more of commodity in his possession, 
prices will probably have fallen so as to enable him to 
realize in money only four per cent. On the other 
hand, the creditor will see that with four per cent more 
in money he can, if he will, buy with his principal 
and interest five per cent more than he virtually loaned 
in commodity. He is satisfied with this increase ; and, 
moreover, he is forced to adopt it, since the natural 
increase of real capital will not enable a borrower to 
pay more. The entrepreneur will stop borrowing if 
more is demanded. The whole adjustment is sup- 
posed to rest on a forecast made by the contracting 
parties and a speculative calculation as to the trend 
of prices. Now, while men do indeed consider the 
future, the adjustment that is actually made does not 
call for foresight. No conscious forward glance is 
necessarily involved therein. It is made by a pro- 
cess that works more unerringly than any joint calcu- 
lation about the coming conditions could possibly do. 
The interest on a loan that is to run through a pe- 
riod in the near future is based on the rate that capital 
is now producing. The evidence as to what that rate 
is must be furnished by the experience of the imme- 
diate past. It takes much experience, of course, 
accurately to determine how much the marginal unit 
of capital for the year 1895 has been worth to the men 
who have used it. This, however, has to be ascer- 
tained as best it can. It takes strategy on the part 



550 ESSENTIALS OF ECONOMIC THEOEY 

of both borrowers and lenders to make the loan rate 
correspond to the marginal earnings. Here there is a 
chance for economic friction and for variations from 
the theoretical standard, and the loan rate will some- 
times exceed it; but in the long run the deviations 
will offset each other. In any case, the experience of 
1906 fixes, with or without variations, the loan rate 
for 1907. 

The earnings revealed by the experience of 1906 
may be theoretically computed either in money or in 
commodity. Let us say they have been five per cent 
in real wealth, but by reason of the fall in prices they 
have been only four per cent in money. That, then, 
is the rate for a loan that is to run through 1907. 
If prices continue to fall at the rate now prevailing, 
the loan rate in money will correspond to the mar- 
ginal earnings of capital for the latter year as ac- 
curately as it does for the former year. Bargain- 
making strategy, the "higgling of the market," may 
yield an imperfect result, and the lender of real or 
commodity capital may or may not get the exact real 
earnings of marginal capital of the same kind. In 
translating the earnings of real capital for the earlier 
or test year into terms of money, the appreciation of 
the coins has unerringly entered as an element. If 
the same rate of appreciation is continued through the 
following year, no deviation of the loan rate from the 
earnings of capital can result from this cause. What- 
ever deviation there is results from the other causes 
just noted. 

In commercial terms a man borrows "money,'' 
and, by using it in his business, produces "money." 
He does this, however, by converting the currency into 
merchandise, and then reconverting this into currency. 



LEADING FACTS CONCERNING MONEY 551 

He gives to the lender approximately what the " mar- 
ginal" part of the loan produces. If this adjustment 
is inexact, the lender will get less or more than the 
actual earnings of such capital. With money gaining 
in its purchasing power at a uniform rate, the adjust- 
ment is as exact as it would have been with money of 
stable value. The appreciation works unerringly in 
translating earnings measured in goods into smaller 
earnings measured in money. The loan rate ap- 
proximates the earnings. 

Effects of Changes in the Rate of Appreciation. — 
What happens if the rate of appreciation changes? 
What if gold gains two per cent in value, instead of 
one, during the second of the periods ? The capitalist 
will then clearly be a gainer, and the entrepreneur 
will be a loser. Getting five per cent in commodity 
as before, the business man, by reason of falling prices, 
will realize only about three per cent in money. His 
contract, based on the experience of an earlier year, 
makes him pay four per cent, and he loses one. Every 
acceleration of the rate of increase in the purchasing 
power of money plays into the hands of lenders. 
Every retarding of that rate plays into the hands of 
borrowers. If in 1907 the entrepreneur gets a three 
per cent rate on what he borrows, as based on the 
experience of 1906, and if the fall in prices is reduced 
during that later year to one per cent, the borrower 
will make a clear gain of one per cent ; and this will 
recoup him for his loss in the earlier period. More- 
over, after a long period of steady prices, the begin- 
nings of a downward trend do not instantly affect the 
loan rate of interest. A period must elapse sufficient 
to establish the fact of this downward trend, and to 
enable the struggles of lenders and borrowers to over- 



552 ESSENTIALS OF ECONOMIC THEORY 

come habit in fixing a new rate that will correspond 
to the new earning power of monetary capital. These 
facts explain what at times looks like a failure of the 
loan market fully to take account of the fall of prices 
during a given interval. What that market really 
does is to base the interest paid in one interval on the 
business experience of another. 

Opposite Reasons for Favoring Gold as a Basis of 
Currency. — What, then, is our practical conclusion ? 
Gold has surprised the world by its increase and by the 
rise in prices by which this change has been attended. 
The interest on loans has risen as the conditions re- 
quired that it should do ; but the rise in interest has 
lagged somewhat behind the rise in prices. The en- 
larged output of the precious metal has been com- 
paratively sudden, and it has been this fact which has 
played into the hands of entrepreneurs and, for a brief 
interval, entailed some loss on lenders. When the 
adjustment of loan interest to the rising prices shall 
be fully made, neither of these parties will gain at the 
other's expense so long as the rise shall continue at 
the prevalent rate; but if the rise should cease as 
quickly as it began, it would be entrepreneurs who 
would lose and lenders who would gain. Loans run- 
ning at rates fixed when prices were rising would be 
paid by an amount of money which would buy more 
commodity than the business would afford. With a 
reduction of the output of gold there will come a de- 
mand for some measure of inflation in order that ris- 
ing prices may forever continue. Adding silver to the 
currency would, as we have seen, accomplish this 
purpose only temporarily. In the long run this metal 
is bound to appreciate like gold. Using paper money 
would have a temporary effect and would be a more 



LEADING FACTS CONCERNING MONEY 553 

dangerous measure. Waiting for a short time for a 
new adjustment of loan interest to the trend of prices 
would be the only rational course. Will the further 
fall of prices rob the entrepreneurs f They must pay 
only the rate of interest that capital earns. If that is 
five per cent, five they must pay, so long as prices are 
stable. With prices falling by one per cent a year, 
they will have to pay only four. Will the fall check 
business and make men afraid to buy stocks of goods ? 
They can carry stocks as cheaply with a four per cent 
rate of interest and declining prices as they can with 
a five per cent rate and stable prices. Will it blight 
enterprise by making men afraid to build mills, rail- 
roads, etc. ? Here again the loan rate of interest 
comes to the rescue of the projectors. If they can 
float their bonds and notes at a lower rate, they can 
build with impunity. 

Steadiness is the vital quality in currency. Let 
its purchasing power be either unchanging or steadily 
changing in either direction, and justice will be done 
and business will thrive. If a metal fluctuates greatly 
in its rate of increase in value, it is a poor coinage 
metal, even though the average rate of gain be slow; 
if it gains slowly and steadily, it is almost an ideally 
good one. 

What would be the effect of any practical measure 
of inflation? If we use as money available for all 
debts the present stock of silver in the world, we make 
one large addition to the volume of money now avail- 
able. We start an inflation that cannot continue by 
the use of silver alone. In the hope of perpetuating 
the rise in prices we may follow the silver with paper. 
By the action of the principle that we have stated 
we shall thus make the interest on loans higher, and 



554 ESSENTIALS OF ECONOMIC THEORY 

every man who buys a farm or a house while the infla- 
tion continues will pay a high rate of interest on an 
enlarged purchase price. When we are forced to stop 
the paper issues, as in the end we must be, the price 
of the land, etc., will fall, and the rate of interest on 
new loans will fall also. The price of all produce will 
go down, and the purchasers of property will struggle 
again, as in the years following the Civil War men 
had to struggle, with a fixed debt, a fixed rate of inter- 
est, and falling prices. The early post helium days 
will be reproduced. Entering on a policy of inflation 
would therefore be inviting men again to suffer what 
those suffered whose hard experience is so frequently 
depicted in Populistic literature. Conceding all that 
is claimed as to the evil that comes from buying or 
mortgaging real property while the volume of money 
is increasing and paying the debt so incurred while 
that volume is relatively contracting, one must see 
that a policy of inflation would end by inflicting exactly 
that evil on new victims, unless a method can be in- 
vented by which the inflation can continue forever. 
Far better will it be to endure the transient evil which 
a slow change in the supply of gold will bring. Re- 
taining gold through all its minor variations will 
mean all the prosperity and all the justice that any 
monetary system can insure. If we shall ever abandon 
this metal, experience will make us wise enough to re- 
turn to it ; but we shall have paid a high price for the 
wisdom. 



CHAPTER XXX 

SUMMARY OF CONCLUSIONS 

Perpetual change is the conspicuous fact of mod- 
ern life. So revolutionary are the alterations which 
a few decades make in the industrial world as to raise 
the question whether there are economic laws which 
retain their validity for any length of time. If there 
are not, we have one economic science now, and shall 
have a different one ten years hence and a widely 
dissimilar one a century later. Of Descriptive Eco- 
nomics this is true, since it changes with the world it 
describes; but it is not true of Economic Theory. 
There are certain principles which are equally valid 
in all times and places. They were true in the begin- 
nings of industry, are true now, and will remain so as 
long as men shall create and use wealth. They are 
not made antiquated either by technical progress or 
by social evolution. We have at the outset stated 
some of these truths. They have reference to man, 
to his natural environment, and to the interactions of 
the two, and they do not depend on the relations 
of man to man. We have also stated other economic 
truths which apply only to man in a social state. They 
are not universal, but are so general that they are 
exemplified in the economic life of every society, from 
the most primitive to the most highly civilized. They 
are the principles of Social Economic Statics, and in 
order to have them distinctly before us we have created 
in imagination a society which is changeless in size, 

555 



556 ESSENTIALS OF ECONOMIC THEORY 

in form, and in mode of economic action. In such a 
condition the wages of labor would remain fixed, as 
would also the interest on capital. Wages and interest 
would absorb the whole product of social industry; 
for the static condition, as we have thus created it, 
excludes profits of the entrepreneur. In broad out- 
line this describes the condition toward which certain 
economic forces are continually impelling the actual 
world. 

There is at each period a standard shape and mode 
of action to which static laws acting by themselves 
would bring economic society. This social norm, 
however, is not the same at any two periods. The 
static laws remain unchanged, but they act in chang- 
ing conditions, and if they were left alone and undis- 
turbed, would give one result in 1907 and another in 
2007. The changes which a century will bring should 
make society larger and richer, the mode of production 
more effective, and the returns for all classes greater. 
The laws which set the standard of wages and interest 
will remain the same, but if the tendencies now at 
work have their natural effect, all these incomes will 
be larger. It is as though great quantities of water 
were rushing into a lake and causing disturbances 
and upheavals of the surface. If the inflow should 
now stop, the surface would subside to a general level. 
If the inflow should recommence, go on for a hundred 
years, and then stop, the surface would again subside 
to a level, but it would be higher than the former one. 
Yet the laws of equilibrium which produced the first 
static level would he identically the same as those which 
produced the second. Social Economic Statics is a 
body of principles which act in every stage of civiliza- 
tion and draw society at every separate period toward 



SUMMARY OF CONCLUSIONS 557 

a static norm, though they do not at any two periods 
draw it toward the same norm. They make actual 
society hover forever about a changing standard shape. 
The laws which govern progress — which cause the 
social norm to take a different character from decade 
to decade, and cause actual society to hover near it in 
its changes — are the subject of Social Economic Dy- 
namics, We have made a study of the more general 
economic changes which affect the social structure, 
and they stand in this order : — 

(1) Increase of population, involving increase in the 
supply of labor. 

(2) Increase in the stock of productive wealth. 

(3) Improvements in method. 

(4) Improvements in organization. 

All these things affect the productive power of 
society, and correlated with them and standing over 
against them is a fifth type of change, which affects 
consumers' wants and determines how productive 
power shall be used. 

We have examined each single change by itself and 
have then endeavored to combine them and get the 
grand resultant of all. Beginning with the increase 
of population, we have traced its effects on wages, 
on interest, and on the values of goods. We have 
made a similar study of the growi^h of capital, the 
progress of technical method, and the organization of 
industry. 

The variation of economic society from its static 
standard offers a problem for solution, and in this con- 
nection the type of change in which the most serious 
evils inhere is that which discards old technical meth- 
ods and ushers in new ones. The question whether 
these evils are destined to increase or to diminish we 



558 ESSENTIALS OF ECONOMIC THEORY 

have answered conditionally on the basis of past ex- 
perience and present tendencies. If competition 
continues and labor retains its mobility, the evils 
will naturally grow less. The grand resultant of all 
the forces of progress is an upward movement in the 
standard of economic life gained, not without cost, 
but at a diminishing cost. 

A vital question is that of the continuance of the 
movements now in progress. Do any of them tend 
to bring themselves to a halt? Is any change on 
which we rely for the hopeful outlook we have taken 
self-terminating? We have found that the growth 
of population tends to go on more slowly as the world 
becomes crowded, while the motives for an increase 
of productive wealth grow stronger rather than 
weaker. Technical progress gives no hint of coming 
to an end, and improvements in organization may go 
on indefinitely, though they will naturally go on more 
slowly as the modes of marshaling the agents of pro- 
duction are brought nearer to perfection. Knowledge 
of the causes of economic change is at best incomplete, 
and enlarging it by the statistical method of study 
will be a chief work for the economists of the future. 
Analytical study points distinctly to a coming time 
of increased comfort for working humanity. Prog- 
ress gives no sign of being self-terminating, so long as 
the force which has been the mainspring of it, namely, 
competition, shall continue to act. 

The suspicious element in the general dynamic 
movement is progress in organization. That which 
we have primarily studied is the marshaling of forces 
for mere production — the creation of efficient mills, 
shops, railroads, etc. This, however, carries with it a 
tendency to create large mills, shops, and railroad 



SUMMARY OF CONCLUSIONS 559 

systems, and, in the end, to combine those which begin 
as rivals in a consoUdation in which their rivalry with 
each other ceases. This means a danger of monopoly, 
and is the gravest menace which hangs over the future 
of economic society. 

If anything should definitely end competition, it 
would check invention, pervert distribution, and lead 
to evils from which only state socialism would offer 
a way of escape. Monopoly is not a mere bit of fric- 
tion which interferes with the perfect working of 
economic laws. It is a definite perversion of the 
laws themselves. It is one thing to obstruct a force 
and another to supplant it and introduce a different 
one ; and that is what monopoly would do. We have 
inquired whether it is necessary to let monopoly have 
its way, and have been able to answer the question 
with a decided No. It grows up in consequence of 
certain practices which an efficient government can 
stop. Favoritism in the charges for carrying goods 
is one of these practices. Railroads have become 
both monopolies and builders of other monopolies. 
Certain principles, which we have briefly outlined, 
govern their policy, and the natural outcome of their 
working is consolidation. This creates the necessity 
for a type of public action which is new in America — 
the regulation of freight charges. 

Akin to this is the necessity for keeping alive com- 
petition in the field of general industry by an effective 
prohibition of various measures by which the great 
corporations are able to destroy it. The dynamic 
element in economic life depends on competition, 
which at important points is vanishing, but can, by the 
power of the state, be restored and preserved, in a new 
form, indeed, but in all needed vigor. With that 



560 ESSENTIALS OF ECONOMIC THEORY 

accomplished we can enjoy the full productive effect 
of consolidation without sacrificing the progress which 
the older type of industry insured. 

The organization of labor, its motives, its measures, 
and its tendencies, — including a tendency toward 
monopoly, — we have examined. Through all the 
wastes and disturbances which the struggle over wages 
occasions we have discovered a certain action of nat- 
ural economic law, and have seen what type of meas- 
ures, on the part of the state, will remove impediments 
in the way of that law and enable it to act in greater 
perfection. 

Connected with the dynamic movement on which 
the future of society depends are the policies of the 
government in connection with currency and with 
protective duties. Here, less action, rather than more, 
is demanded on the part of the state. While no re- 
newal of a laissez-faire policy is possible, a reduction 
of the duties which now play into the hands of monop- 
oly is distinctly called for. In connection with cur- 
rency a greater trust in nature and a smaller reliance 
on governments will give the best results. 

Our studies have included, not the activities of the 
whole world, but those of that central part of it which 
is highly sensitive to economic influences. The whole 
producing mechanism here responds comparatively 
quickly to any force which makes for change. This 
society par excellence is extending its boundaries 
and annexing successive belts of outlying territory; 
and as this shall go on, it must bring the world as a 
whole more and more nearly into the shape of a single 
economic organism. The relations of the central so- 
ciety to the unannexed zones are attaining transcen- 
dent importance, and a fuller treatment of Economic 



SUMMARY OF CONCLUSIONS 561 

Dynamics than is possible within the limits of the 
present work would give much space to such subjects 
as the transformation of Asia and the resulting changes 
in the economic life of Europe and America. Here 
again the conscious action of the people determines the 
economic outcome. In the main we can still leave the 
natural forces of industry to work automatically ; but 
we have passed the point where we can safely leave to 
self-regulation the charges of the common carrier, 
the conduct of monopolistic corporations, or certain 
parts of the policy of organized labor. Foreign rela- 
tions are, of course, a subject for public control, and 
they are coming to affect in a most intimate way our 
own economic life. Everywhere our future is put 
into our own hands and will develop the better the 
more we know of economic laws and the more energy 
we show in applying them. The surrendering of indus- 
tries generally to the state may be avoided, and the 
essential features of the system of business which evo- 
lution has created may be preserved ; but to keep this 
system free from unendurable evils will require, on 
the part of the people, a rare combination of intelli- 
gence and determination. It will require a public 
policy that shall neither be hampered by prejudice 
nor incited by ebullitions of popular feeling, but shall 
be guided through a course of difficult action by a 
knowledge of economic law. 



20 



INDEX 



Abstinence, 339 et seq. 

Accumulation, the law of, Ch. 
XX. 

Altruism, 39. 

Arbitration, 469, Ch. XXVI; 
as affected by monopoly, 483 
et seq. ; compulsory, 489-490, 
497-498, 502; voluntary, 493 
et seq. 

Birth rate, as affected by eco- 
nomic conditions, 328 et seq. 
Bohm-Bawerk, 17 note, 33. 
Boycott, Ch. XXVII. 

Ca'-canny, 509 et seq. 

Capital, " 19, 24-26, 31-33 ; as 
affected by improvements in 
method, Ch. XVIII; as orig- 
inating in profits, 230, 301 ; 
contrasted with capital goods, 
28-34; exportation of, 230- 
235 ; ground and auxiliary, 
166; mobility of, 37-38, 127- 
128, 151-152; primitive, 1-2; 
rent of, 170-171 ; sources of, 
353 et seq.; waste of, 307 
et seq. 

Capital, accumulation of, Ch. XX ; 
as affected by monopoly, 355- 
357 ; as affected by standards 
of living, 342 et seq. 

Capital, effects of increase of, 
203-204 ; on economic struc- 
ture of society, 246-248 ; on 
interest, 319-320; on wages, 
31Q et seq. 

Capital goods, 16,' 17, 19 note; 
active, 20 et seq.; active and 
passive, 186-187 ; contrasted 
with capital, 28-34; passive, 
20 et seq. 

CapitaUst, 84-85, 117. 

Capitalization of railways, proper 
basis of, 445-449. 



Caste, effect on increase of pop- 
ulation, 332; effect on values, 
268. 

Centralization of production, 200- 
201, 289. 

Collective bargaining, 467 et seq. 

Combination, railway, 419 et seq., 
433 et seq. 

Commerce, effect on diffusion of 
methods, 229 ; effect on emi- 
gration and immigration, 229- 
230. 

Competition, 67, 75-77, note; 
143-150, 198 et seq.; effect on 
inventions, 362 et seq.; effect 
on labor organizations, 488- 
490; in transportation, 406, 
419-420, 428 et seq. ; relation to 
progress, 533-534. 

Competition of markets, effect 
on railway charges, 403 et seq. 

Competition, potential, as a regu- 
lator of monopolies, 380 et seq. 

Conciliation, 490 et seq. 

Consolidation, 382-383, 390 et 
seq., 534 et seq., 558-559 ; 
effect on strikes, 464 et seq.; 
of railways, 396-397, 419 et 
seq. 

Consumers' goods, 25-26, 34. 

Consumers' rent, 172 note, 173. 

Consumers' surplus, 105. 

Consumption, 24-25, note ; as 
affected by improvements in 
methods, 273-274; by in- 
creased productive power, 305- 
306 ; by increase of individual 
incomes, 292 ; diversification 
of, 62-63, 206-207. 

Corporations, 376 et seq. 

Cost, 130; contrasted with util- 
ity, 43-44; elements of, 115- 
116; fixed and variable, 412 et 
seq.; in static state, 132-133; 
law of increasing, 44-47; low- 



563 



564 



INDEX 



est, as determinant of standard 
price, 263-264 ; measurement 
of, 47-49, 209; relation to 
final utility, 53-54; relation 
to incomes, 126 ; relation to 
price, 114-115; specific, 45. 

Demand and supply, 93-94, 96. 

Demand, reciprocal, 292. 

Demand, relation to final utility, 
97. 

Diminishing productivity, 148- 
149 ; of labor, 134 et seq. 

Diminishing returns, 56 ; in agri- 
culture, 165-166, 398 et seq.; 
in manufactures, 398-399. 

Diminishing utility, law of, 98. 

Distribution, 60 ; contrasted with 
production, Ch. V; functional 
and personal, 89-91 ; group, 
92-93. 

Division of labor, Ql et seq. 

"Dumping," 526. 

Dynamic influences, 130-132, 195 
et seq. 

Dynamics, Ch. XII. 

* 
Economics, 1 et seq., 61. 
Education, effect on increase of 

population, 330-331. 
Effective utility, 8 note, 54 note. 
Eight-hour movement, 514-516. 
Entre-preneur , 83 et seq.; 117 et 

seq.; 153 et seq. ; in dynamic 

state, 123-124; in static state, 

121-122. 
Exchange, 63-64. 

Factory legislation, effect on 

increase of population, 331- 

332. 
Final productivity, 139 et seq., 

156-157. 
Final utility, 8 note, 51 note, 54 

note, 98-99 ; relation to cost, 

53-54 ; relation to demand, 

97. 
Free coinage, 538-539. 
Free trade, arguments for, 231, 

518-519. 
Friction, economic, 373. 
Future, undervaluation of, 345 

et seq. 



Giddings, F. H., 381. 
Government ownership, 378, 383- 

385. 
Groups, economic, 64 et seq. 

Immigrants, disadvantages of, 
245 et seq. 

Improvements in methods, 204, 
212; as source of new capital, 
230 ; effect on capital, Ch. 
XVIII; effect on labor, 312 
et seq. ; effect on quality of 
goods, 273-274; in backward 
regions, 235-236. 

Increasing returns, 398-401. 

Inflation, effects of, 539 et seq. 

Interest, 85, Ch. IX; as affected 
by changes in the value of 
money, 543 et seq.; as affected 
by increase of capital, 319-320 ; 
rate of, effect on the accumu- 
lation of capital, 339 et seq.; 
real and loan, 547 et seq.; re- 
lation to rent, 182-184; static, 
224-225. 

Inventions, 204, Chs. XVI, XVII ; 
as affected hy competition, 
362 et seq. ; as affected by mo- 
nopoly, 3G2 et seq. ; conditions 
giving rise to, Ch. XXI ; ef- 
fect on capital, Ch. XVIII; 
on economic structure of so- 
ciety, 249 et seq.; on labor, 
254-255 ; effects of a series 
of, 290 et seq. 

Kartel, 392. 

Labor, 35 ; as a measure of cost, 
209 ; as affected bj^ improve- 
ments in method, 312 et seq.; 
classification of, 13-15; defi- 
nition of, 9-10, 82-85; di- 
minishing productivity of, 134 
et seq.; division of, 61 et seq.; 
managerial, 116-117; mobil- 
ity of, 127-128, 133-134; mo- 
nopolj', 471 et seq., 504 ; prod- 
uctivity of, 17-18, 133 et seq.; 
protective, 10-11; rent of, 
171-172. 

Labor organization, Ch. XXV. 

Labor-saving devices, Chs. XVI, 
XVII ; effect on economic 



INDEX 



565 



structure of society, 249 et 
seq. ; effect on labor, 254-255. 

Laissez-faire, 384-385, 390. 

Land, 9, 36-37, Ch. XI; con- 
trasted with artificial capital 
•goods, 178-179, 188-190. 

Machinery, 72-73. 

Mai thus, 321 et seq. 

Margin of cultivation, 165 et seq. 

Marginal utility, 51 note. 

Market, 95 note. 

Market price, 93-94. 

Mill, J. S., 220 note, 257. 

Money, 29-30; Ch. XXIX. 

Monopoly, 201, 559-560; as 
affected by patents, 367-368; 
as limiting employment, 297- 
298 ; effect on accumulation, 
355-357 ; on inventions, 362- 
363; on progress, Ch. XXII; 
on standard of living, 323 ; 
government ownership of, 378, 
383-385 ; in transportation, 
435 et seq.; inventor's, 360 et 
seq.; labor, 456, 462, 467, 471 
et seq., 504 ; nature of, 380 ; 
pubhc character of, 389 ; re- 
lation to arbitration, 483 et 
seq.; relation to protection, 
525 et seq.; relation to railway 
discrimination, 396-397 ; re- 
stricted by potential compe- 
tition, 380 et seq. 

Monopoly price, as affected by 
increase of wages, 479-480. 

Organization of industry, 205, 

318-319, 368 et seq. 
Organization of labor, Ch. XXV. 

Paper Money, 552-554. 

Patents, 265-266 ; abuse of, 361 ; 
as a means of curbing mo- 
nopolies, 367-368 ; justification, 
360-361. 

Patten, S. N., 207 note. 

Political Economy, 3 note, 61. 

Pool, 392. 

Population, as affected by factory 
legislation, 331 ; as affected 
by increase of wealth, 333 ; as 
affected by rise of wages, 335 
et seq.; distribution of, 215 et 



seq.; effect of increase of, 203, 
244 et seq., 315 et seq.; law 
of, Ch. XIX. 

Population, density of, 215-216 ; 
effect on industry, 237 et seq.; 
effect on wages, 241-243. 

Population, increase of, as af- 
fected by caste, 332 ; by edu- 
cation, 330-331 ; by standard 
of living, 324 et seq. 

Price, 97 ; as affected by inflation, 
539 et seq. ; determination of, 
93-96 ; equalization of, 98-100 ; 
market, 93-94 ; monopoly, 479- 
480; normal, 114, 120-121; of 
complex goods, 100 et seq.; re- 
lation to cost, 114; standard, 
determined by lowest cost, 263— 
264, 285-288; static, 202-203, 
224. 

Production, contrasted with dis- 
tribution, Ch. V; requisites of, 
15-16. 

Productivity, 42-43 ; as basis 
for arbitration awards, 475 et 
seq.; final, 139 et seq., 148-149, 
157 ; measurement of, 55-60. 

Profit, 77 note, 85 et seq., 119-122 
note, 129 note, 373; as af- 
fected by inflation, 539 et seq.; 
as source of capital, 301, 354- 
355 ; in static state, 87. 

Protection, Ch. XXVIII, 560; 
argument for, 520 et seq.; re- 
lation to monopoly, 625 et seq. 

Rae, John, 17 note. 

Railway capitalization, proper 
basis of, 446-450. 

Railway charges, Ch. XXIV; as 
affected by competition of 
markets, 403 et seq.; limits of, 
403 et seq. ; state regulation of, 
439 et seq. 

Railway consolidation, 396-397, 

419 et seq. 

Railway discriminations, as creat- 
ing monopohes, 393-394, 396, 

420 et seq. 

Rent, Ch. X; as differential 
product, 163-165 ; as product 
of land, 162-163 ; consimaers', 
172-173 note; gross and net, 
180-183; of capital, 170-171; 



566 



INDEX 



of concrete instrtiments, 174- 
177; of labor, 171-172; re 
lation to interest, 182-184 
relation to price, 191-194 
traditional formula, 160-162 
universality of principle, 177— 
178. 

Ricardo, 121. 160, 179. 

Risk, 122, 123 note, 214. 

Social Economics, 3 note, 61. 

Socialism, 378, 384-386, 395, 397. 

Socialistic state, group organiza- 
tion in, 71. 

Specific utility, 8 note. 

Standard of living, 322 et seq., 
342 et seq. 

Static state, 132-133. 

Strike, sympathetic, 505. 

Strikes, effectiveness under vary- 
ing conditions, 462 et seq. 

Substitution, 267 et seq. 

Supply and demand, 93-97. 

Supply, normal, 114. 

Surplus, consumers', 105. 

Tariff, relation to trusts, 528 et seq. 

Trade union, power of, under 
varying conditions, 462 et seq. ; 
restriction of membership, 503- 
504; restriction of output, 
509 et seq. 

Transportation, Chs. XXIII, 
XXIV; as affected by dimin- 
ishing returns in agriculture, 
398 et seq.; monopoly in, 435 
et seq. 

Trusts, 201, 369-371, 391-392; 
as affected by railway discrim- 
inations, 393-394 ; methods of 
stifling competition, 394-395, 
527-528 ; relation to tariff, 528 
et seq. 

Tuttle, C. A., 34 note. 



Union label, 506 et seq. 

Utility, absolute, 54 note ; con- 
trasted with cost, 43-44 ; di- 
minishing, 98 ; effective, 54 note ; 
elementary, 11-12; final, 51 
note, 54 note, 97-98; form, 12; 
marginal, 51 note; measure- 
ment of, 40 et seq. ; of pro- 
ducers' goods, 42-43 ; place, 
12-13; varieties of, 7-8. 

Value, 40-42, 99-101; affected 
by caste, 268 ; in primitive 
conditions, 50-51 ; natural, 94- 
95 ; normal, Ch. VII ; of com- 
plex goods, 100 et seq.; static, 
124-125, 202-203. 

Value of service principle, 405 
et seq. 

Violence in labor disputes, 457 
et seq. 

Wages, Ch. VIII, 85, 86; as 
affected by improved methods, 
299-300; as affected by im- 
proved organization of in- 
dustry, 318-319; as affected 
by increase of capital, 316 et 
seq. ; as affected by inferior 
bargaining power of labor, 452 ; 
as affected by organization of 
labor, Ch. XXV; increase of, 
effect on monopoly price, 479- 
480; law of, 143 et seq.; rise 
of, effect on monopoly, 335 
et seq. ; static, 224-225. 

"Waiting," 187-188. 

Wants, changes in, 206; elas- 
ticity of, relation to improve- 
ments in methods, 267 et seq. 

Wealth, 5-9 ; increase of, effect 
on population, 333. 

Webb, Sidney & Beatrice, 357. 



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The Principles of Wealth and Welfare 

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Cloth, jj6 pages, i2mo, $ i.io net 



THE MACMILLAN COMPANY 

PUBLISHERS, 64-66 FIFTH AVENUE, NEW YORK 



By FRANKLIN HENRY GIDDINGS 

Professor of Sociology, Columbia University 

Democracy and Empire 

With Studies of their Psychological, 
Economic, and Moral Foundations 

Cloth, 8vo, $2.50 

" The work as a whole is the most profound and closely reasoned defence of territorial 
expansion that has yet appeared. . . . The volume is one of rare thoughtfulness 
and insight. It is a calm, penetrating study of the trend of civilization and of our 
part in it, as seen in the light of history and of evolutionary philosophy." 

— The Chicago Tribune. 

"The question which most interests both Professor Giddings and his readers is the 
application of his facts, his sociology, and his prophecy, to the future of the American 
Empire. . . . The reader will rise from it with a broader charity and with a more 
intelligent hope for the welfare of his country." — The Independent. 

The Principles of Sociology 

An Analysis of Phenomena of Association and of Social Organization 

8vo, Cloth, $3.00 net 

" It is a treatise which will confirm the highest expectations of those who have expected 
much from this alert observer and virile thinker. Beyond a reasonable doubt, the 
volume is the ablest and most thoroughly satisfactory treatise on the subject in the 
English language." — Literary World. 

" The distinctive merit of the work is that it is neither economics nor history. . . . He 
has found a new field and devoted his energies to its exploration. . . . The chapters 
on Social Population and on Social Constitution are among the best in the book. It 
is here that the method of Professor Giddings shows itself to the best advantage. The 
problems of anthropology and ethnology are also fully and ably handled. Of the 
other parts I like best of all the discussion of tradition and of social choices; on these 
topics he shows the greatest originality. I have not the space to take up these or 
other doctrines in detail, nor would such work be of much value. A useful book 
must be read to be understood." — Professor Simon N. Patten, in Science. 

The Elements of Sociology 

A Text-Book for Colleges and Schools 

8vo, Cloth, $1.10 net 

" It is thoroughly intelligent, independent, suggestive, and manifests an unaffected 
enthusiasm for social progress, and on the whole a just and sober apprehension of the 
conditions and essential features of such progress." 

— Professor H. SiDGWiCK, in The Economic Journal. 

" Of its extreme interest, its suggestiveness, its helpfulness to readers to whom social 
questions are important, but who have not time or inclination for special study, we 
can bear sincere and grateful testimony." — JVeiu York Titnes. 

" Professor Giddings impresses the reader equally by his independence of judgment and 
by his thorough mastery of every subject that comes into his view." 

— The Churchman. 



THE MACMILLAN COMPANY 

64-66 FIFTH AVENUE, NEW YOEK ^ 















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